EUR/USD Forecast: Spanish Inflation and Fed Rate Cut Speculations

Highlights

• The EUR/USD declined by 0.39% on Thursday, ending the session at $1.10612.
• US economic indicators reflected a robust US economy, impacting buyer demand for the EUR/USD.
• Central bank commentary, Spanish inflation, and the Chicago PMI are the focal points on Friday.

Thursday Overview

The EUR/USD declined by 0.39% on Thursday. Partially reversing a 0.57% gain from Wednesday, the EUR/USD ended the session at $1.10612. The EUR/USD rose to a high of $1.11393 before falling to a low of $1.10552.

Spanish Inflation and ECB Commentary in Focus

On Friday, inflation numbers from Spain could set expectations for December inflation trends across the euro area. A pickup in inflation would support a delay in discussions about rate cuts.

An elevated interest rate environment would impact borrowing costs and disposable income. Downward trends in disposable income could reduce consumer spending and dampen demand-driven inflationary pressures.

Economists forecast the Spanish annual inflation rate to rise from 3.2% to 3.4% in December. However, economists predict the core inflation rate will soften from 4.5% to 4.3%.

Beyond the numbers, ECB commentary also needs monitoring. Comments regarding interest rates could move the dial.

The US Private Sector in the Spotlight

On Friday, the Chicago PMI will garner investor interest. Economists forecast the Chicago PMI to slide from 55.8 to 51.0 in December. A slowdown in private sector activity would support bets on a Q1 2024 Fed rate cut. However, a drop below 50 could reignite fears of a hard landing.

Chicago ranks third in the US by gross metropolitan product, behind New York and Los Angeles. The Chicago PMI is also a leading indicator for the ISM survey-based PMIs.

Beyond the numbers, investors must consider Fed chatter. Comments regarding inflation, the economy, and interest rates warrant investor attention.

Short-Term Forecast:

Near-term EUR/USD trends will hinge on euro area inflation numbers and ECB commentary. Hotter-than-expected inflation numbers for December could delay ECB discussions about rate cuts. A higher-for-longer ECB rate path would tilt monetary policy toward the EUR and support a move toward $1.12.

EUR/USD Price Action

Daily Chart

The EUR/USD held above the 50-day and 200-day EMAs, sending bullish price signals.

A EUR/USD break above the $1.10720 resistance level would support a move to the Thursday high of $1.11393.

Spanish inflation numbers, the Chicago PMI, and central bank commentary are the focal points for Friday.

However, a EUR/USD fall below the $1.10500 handle would give the bears a run at the 1.09294 support level.

The 14-period Daily RSI, 63.00, suggests a EUR/USD move to the $1.11 handle before entering overbought territory.

4-Hour Chart

The EUR/USD remained above the 50-day and 200-day EMAs, affirming bullish price signals.

A EUR/USD move through the $1.10720 resistance level would give the bulls a run at the Thursday high of $1.11393.

However, a drop below the $1.10500 handle would bring the 50-day EMA and sub-$1.10 into play.

The 14-period RSI on the 4-hour chart, 54.50, suggests a EUR/USD move to the $1.11500 handle before entering overbought territory.