EUR/USD Prices Forecast: Euro Struggles Amid US Economic Strength, Hawkish Fed

Highlights

• Euro pressured by strong U.S. economy.
• Fed monitors inflation fight, interest rates.
• Euro Zone Trade Balance improves. 

Overview

The Euro is facing downward pressure against the U.S. Dollar, as the robustness of the U.S. economy reinforces the likelihood of sustained higher interest rates. Despite prevailing expectations of the Federal Reserve maintaining interest rates in September, recent resilient economic indicators from the U.S. suggest that interest rates might stay elevated for an extended period.

Notably, U.S. single-family homebuilding surged in July, coupled with an unexpected rebound in factory production. This economic strength is carrying the weight of elevated interest rates, making it imperative for the Federal Open Market Committee (FOMC) to exercise patience and retain a restrictive monetary policy stance to counter the residual inflationary pressures.

Fed’s Vigilance Amid Inflation Battle

In the context of the Fed’s recent actions, the central bank’s meeting minutes released on Wednesday emphasized that the battle against inflation is far from concluded, requiring ongoing vigilance unless economic conditions change significantly. These minutes correspond to the July meeting, during which the central bank enacted a quarter-point increase in interest rates. Given the persistence of inflation above the Committee’s target and the tight labor market, a consensus among most participants emerged regarding the existence of substantial upside risks to inflation. Consequently, the potential for further monetary tightening remains on the table.

Economy Resilient after 11 Fed Rate Hikes

Since March 2022, the Federal Reserve has executed rate hikes at all but one of its meetings, amounting to a total of 11 increases. While the June meeting this year maintained rates to gauge their impact on curbing economic growth and alleviating inflation, the recent housing data presents a mixed picture. New home construction in the U.S. escalated by 3.9% month-over-month to reach 1.45 million in July, surpassing consensus estimates. However, building permits experienced a meager 0.1% monthly gain, registering 1.44 million, and marking a 13% year-over-year decrease.

Euro Zone Trade Balance Climbs

Shifting to the Euro Zone, June 2023 saw the region’s exports to the global market for goods valued at €252.3 billion, a 0.3% upswing from June 2022. In contrast, imports from the rest of the world amounted to €229.3 billion, representing a substantial 17.7% decline from the previous year. Consequently, the Euro Zone achieved a remarkable trade surplus of €23 billion in June 2023, compared to a €27.1 billion deficit in June 2022. Meanwhile, intra-euro area trade contracted to €231.6 billion, a decline of 4.1% compared to June 2022, illustrating the evolving trade dynamics within the region.

Technical Analysis

The EUR/USD currently shows a price of 1.0867, slightly lower than the 4-hour moving average of 1.0948, indicating a potential short-term bearish sentiment. The RSI at 34.09 suggests bearish momentum, approaching the oversold threshold. Major support lies at 1.0844 to 1.0834, and resistance at 1.1042 to 1.1065.

The market’s proximity to the support zone implies cautious movement. Given the price below both moving averages and RSI in the bearish region, the sentiment leans towards bearish with support at 1.0844 to 1.0834 in sight.