EUR/USD Forecast: US Dollar Rises Amid Middle East Concerns; German Production Eyed

Highlights

• EUR/USD rose by 0.36% on Friday, capping off a two-day gain, settling at $1.05844.
• Tensions in the Middle East bolstered US dollar demand this morning, hinting at potential market volatility.
• German industrial production in focus: Anticipated 0.1% fall after July’s 0.8% decline.

Friday Overview

On Friday, the EUR/USD gained 0.36%. Following a 0.41% rise on Thursday, the EUR/USD ended the day at $1.05844. The EUR/USD fell to a low of $1.04821 before reaching a high of $1.06000.

The Middle East Conflict and German Industrial Production in the Spotlight

This morning, the fear of an escalation in the Middle East conflict drove demand for the US dollar. A flight to safety may continue if the Middle East region destabilizes.

Following better-than-expected factory orders, German industrial production will also be in focus on Monday. Economists forecast industrial production to fall by 0.1% in August. Industrial production declined by 0.8% in July.

German industrial production figures are unlikely to influence the higher-for-longer ECB interest rate path. The German manufacturing sector accounts for less than 20% of the German economy. Nonetheless, an improving macroeconomic environment would ease jitters of a prolonged economic recession and support demand for the EUR.

The ECB remains focused on wage growth and the services sector. On Tuesday, ECB Chief Economist Philip Lane said the ECB would monitor services inflation for a prolonged period.

With the German economy in the spotlight, ECB commentary also needs consideration. ECB Executive Board members Andrea Enria and Luis de Guindos are on the ECB calendar to speak on Monday.

Fed Speeches to Influence Fed Rate Path Bets

Later today, FOMC member commentary may provide investors with an early assessment of the US Jobs Report.

FOMC voting members Michael Barr, Lorie Logan, and Philip Jefferson are on the economic calendar to speak today. The EUR/USD will likely respond to views on wage growth, the Middle East conflict, and interest rates.

Considering the US Jobs Report, wage growth softened in August. Softer wage growth may impact consumer spending, easing demand-driven inflationary pressures. A softer inflation outlook will likely ease pressure on the FED to pursue a hawkish rate path to tame inflation.

Short-Term Forecast:

Monetary policy divergence remains tilted in favor of the US dollar. Risk aversion will also fuel demand for the US dollar. However, FOMC members could narrow the divergence in speeches ahead of US inflation figures on Wednesday and Thursday.

EUR/USD Price Action

Daily Chart

The EUR/USD sat below the 50-day and 200-day EMAs, signalling bearish price trends.

A EUR/USD break above the $1.06342 resistance level would support a move toward the 50-day EMA. Better-than-expected German industrial production numbers and easing geopolitical tensions would bring $1.07 into view.

Hawkish Fed comments and rising bets on a Fed rate hike would pressure the EUR/USD. However, updates from the Middle East will likely be pivotal. The threat of an escalation would overshadow economic calendar influences.

A drop below $1.0550 would give the bears a run at the $1.05230 support level and the Friday low of $1.04821.

The 14-period Daily RSI at 41.06 supports a EUR/USD fall through the $1.05230 support level before entering oversold territory.

4-Hour Chart

The EUR/USD is positioned above the 50-day EMA but remains below the 200-day EMA, indicating bullish short-term but bearish longer-term price trends. A EUR/USD break below the 50-day EMA would bring the $1.05230 support level into play.

However, a return to $1.06 would give the bulls a run at the $1.06342 resistance level.

The 14-period 4-Hourly RSI at 53.96 suggests a EUR/USD move to the $1.06342 resistance level before entering overbought territory.