EUR/USD Prices Forecast: Lower on German Business Plunge, Fed Policy Fears

Highlights

• Euro dips due to stark German business decline.
• German service firms slump amplifys inflationary pressures.
• Markets await Powell’s Jackson Hole address.

Euro Declines on Weak German Business Activity Amidst U.S. Dollar Resilience

The Euro tumbled against the U.S. Dollar on Wednesday, pressured by deteriorating German business activity, the worst since May 2020, even as the U.S. Treasury yields dipped. Market anticipation for insights on the Federal Reserve’s monetary stance is building up, with particular focus on Chair Jerome Powell’s forthcoming speech at the Jackson Hole symposium.

German Business Environment Worsens:

Germany’s business activity plunged at its quickest pace in over three years this August. The HCOB German Flash Composite PMI, an integral measure of manufacturing and service sectors making up the majority of Germany’s economic activity, dropped to 44.7 from July’s 48.5, surprising analysts. This marks the second successive month the indicator has remained beneath the growth level of 50. This decline underscores a deepening manufacturing downturn and a simultaneous contraction in services. Hamburg Commercial Bank’s chief economist, Cyrus de la Rubia, noted the evaporating hope of the service sector saving the German economy, indicating a looming dual-sector recession.

Inflationary Concerns

While the manufacturing PMI showed a slight improvement, the service sector reported its first contraction in eight months. A pervasive gloomy sentiment persists among businesses, influenced by rising interest rates, mounting customer uncertainty, and inflation. In fact, service firms are notably aggressive in raising their prices, intensifying inflationary pressures.

U.S. Monetary Policy

All eyes are on the Jackson Hole event and particularly Powell’s address to understand the Fed’s future monetary policy direction. While recent robust U.S. economic figures have mitigated recession concerns, persistently high inflation has markets on edge. Indications are that the central bank may maintain higher interest rates for an extended period. The probability of the Fed maintaining its current rate at its next policy gathering is high, but anticipations of another hike this year are also surging.

Short-Term Forecast

With the Euro showing vulnerability due to German economic contraction and the markets keenly awaiting Fed signals, near-term currency movements may hinge on perceived U.S. monetary policy shifts, making the trading environment bearish for the Euro.

Technical Analysis

The EUR/USD currently trades at 1.0829, a drop from the previous 4-hour close at 1.0861. The pair is below both the 200-4H moving average (1.1001) and the 50-4H moving average (1.0900), indicating a bearish trend. Furthermore, the 14-4H RSI stands at 33.81, suggesting that the market is approaching an oversold territory but still reflects weaker momentum.

While the current price resides below the main resistance area (1.1042 to 1.1065), it’s precariously close to the main support zone (1.0844 to 1.0834). In light of these factors, the EUR/USD market sentiment appears bearish on the 4-hour timeframe.