EUR/USD Forecast: Navigating German Trade Data and ECB Chatter – The Analysis

Highlights

• EUR/USD ends the week lower, down 0.20% to $1.07731 amid macroeconomic turbulence.
• German trade data in focus; weak exports would drive demand concerns.
• ECB’s Lagarde and Lane’s upcoming comments could sway the EUR/USD trajectory.

Friday Overview

The EUR/USD slid by 0.65% on Friday. Following a 0.73% tumble on Thursday, the EUR/USD ended the week down 0.20% to $1.07731. The EUR/USD rose to a high of $1.08820 before falling to a low of $1.07720.

German Trade Data and ECB Commentary to Draw Interest

German trade data for July will be in focus this morning. On Friday, the finalized manufacturing PMI survey for August revealed a continued slump in demand. The PMI survey suggested weak exports and a likely fall in imports.

Investors should consider the headline trade balance. However, a sharp fall in imports and exports would paint a grim macroeconomic backdrop for the German economy.

Economists forecast the German trade surplus to narrow from €18.7 billion to €18.0 billion. Significantly, economists expect exports to decline by 1.5% (June: +0.1%). With investor jitters lingering over the Chinese economy, a slump in exports to China would test buyer appetite.

However, news of Beijing introducing more measures to support the property market will influence investor sensitivity.

Beyond the numbers, ECB commentary will move the dial. ECB President Lagarde and ECB Chief Economist Philip Lane are on the calendar to speak today. Last month, Lane said the Eurozone should avoid a deep and sustained recession. A positive outlook on the euro area economy and the talk of sticky inflation would raise bets on ECB rate hikes beyond September.

However, the EUR/USD could unravel early gains if Lagarde and Lane project a materially softer inflation environment.

Labor Day Puts the Fed in the Spotlight

After the US Jobs Report, investors will turn their attention to Fed commentary. Bets on further Fed rate hikes eased substantially last week. A rise in the unemployment rate and softer wage growth eased expectations of further Fed interest rate hikes.

According to the CME FedWatch Tool, the probability of a September Fed rate hike stood at 7.0%. One week earlier, the chance of a September rate hike was 20.0%. In November and December, the probability of Fed rate hikes declined sharply. Significantly, the chances of a December Fed 25-basis point rate cut stood at 3.9, up from 1.8% one week earlier.

In contrast, the ECB remains on target to hike rates by 25 basis points this month. The sharp fall in bets on further Fed rate hikes exposes the EUR/USD to hawkish Fed chatter.

Hawkish Fed commentary would test the theory of a Fed pause. There are no US economic indicators to draw interest, with the US markets closed for Labor Day.

Immediate Forecast: German Exports and the ECB in Focus

The ongoing weak demand environment suggests a sharp decline in German exports. However, ECB President Christine Lagarde and Chief Economist Philip Lane might distract investors. Investors will likely focus on forward guidance beyond September and inflation expectations.

EUR/USD Price Action

Daily Chart

The EUR/USD remained below the 50-day and 200-day EMAs after two days of heavy selling. However, the EUR/USD held above the trend line and the $1.07635 support level this morning. A EUR/USD move through the 200-day EMA would give the bulls a run at the $1.08322 resistance level.

However, German trade data and ECB commentary must align to support a breakout from the 200-day EMA. A larger-than-expected fall in German exports and dovish ECB commentary would see the EUR/USD break below the trend line and fall through the $1.07635 support level. A fall through the trend line would bring $1.0750 into play.

Considering the 14-Daily RSI at 38.68 and the EMA signals, the EUR/USD could target $1.0750 before entering oversold territory.

4-Hourly Chart

The 4-Hourly Chart reaffirmed the near-term bearish trend this morning. The EUR/USD remains below the 200-day and 50-day EMAs and the $1.08322 resistance level. However, the EUR/USD holds above the trend line and the $1.07635 support level.

Avoiding a break below the trend line would give the bulls a run at $1.08 and the $1.08322 resistance level. However, German trade data must impress, and ECB commentary must be hawkish to support a breakout.

A slump in German exports and a lack of commitment to rate hikes beyond September could see the EUR/USD break below the trend line. A break below the trend line would bring the $1.07635 support level and $1.0750 into play.

With the downward bias intact, the 14-4H RSI at 37.66 signals more EUR/USD losses before entering oversold territory.