EUR/USD Weekly Forecast – Bears to Target $1.07 on German Stats

Highlights:

• Recessionary jitters will leave the EUR/USD more sensitive to weaker German economic indicators.
• Sticky euro area inflation and hawkish ECB chatter would cushion the downside.
• US Core PCE Price Index numbers could support Fed Chair Powell’s two-rate hike outlook and a peak Fed Funds Rate above 5.6%.

It’s a relatively busy week for the EUR/USD, with the German economy, inflation, and ECB member chatter in focus.

On Monday, German Ifo Business Climate Index will move the dial ahead of German GfK consumer climate numbers on Tuesday.

The German economic recession and concerns over the global macroeconomic environment could see the Business Climate Index and sub-components take a tumble. However, tight labor market conditions should limit the downside of the Consumer Climate Index.

On Thursday and Friday, the German economy remains in the spotlight. Prelim inflation numbers for June and retail sales figures for May will be in focus on Thursday ahead of unemployment figures on Friday. We expect inflation to be the key driver, with prelim euro area inflation figures also significant on Friday.

The ECB

Beyond the stats, investors should also consider ECB commentary. ECB President Lagarde (Mon/Tues/Wed), Chief Economist Philip Lane (Wed), and Executive Board members Luis de Guindos (Wed), Fabio Panetta (Tues), Frank Elderson (Tues), Andrea Enria (Wed), Isabel Schnabel (Tues), and Elizabeth McCaul (Mon) are on the calendar to speak.

While the ECB looks set to hike rates in July, there is uncertainty about the September monetary policy decision. Support for a September hike would deliver EUR/USD support.

The ECB will also release the monthly Economic Bulletin on Thursday, with the outlook on inflation, the economy, and interest rates likely focal points.

EUR/USD Technical Indicators

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The EUR/USD sat below the 50-day EMA, currently at $1.08985. The 50-day EMA pulled away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A move through the 50-day EMA ($1.08985) would support a breakout from R1 ($1.0988) to give the bulls a run at R2 ($1.1084) and $1.1100.

However, a fall through the 100-day ($1.08591) and 200-day ($1.08446) EMAs would bring S1 ($1.0820) and sub-$1.08 Major Support Levels into play. A move through the 50-day EMA would send a bullish signal. Sticky core euro area inflation and hawkish ECB commentary would support bullish trends.

Resistance and Support Levels

The EUR/USD needs to move through the $1.0916 pivot to target the First Major Resistance Level (R1) at $1.0988 and last week’s high of $1.10122. A move through the $1.0950 would signal a bullish week. However, the economic indicators and central bank commentary need to deliver EUR support to give the bulls a run at $1.11.

In the case of a breakout week, the EUR would likely test resistance at the Second Major Resistance Level (R2) at $1.1084 to bring $1.11 into view. The Third Major Resistance Level (R3) sits at $1.1252.

Failure to move through the pivot would leave the First Major Support Level (S1) at $1.0820 in play. In case of a data and central bank-fueled sell-off, the EUR/USD would likely test the Second Major Support Level (S2) at $1.0748 and support at $1.07.

The Third Major Support Level (S3) sits at $1.0580.

The US Week Ahead

It is a busy week ahead for the greenback.

Consumer confidence and core durable goods orders kick-start the week on Tuesday. With elevated inflation and a hawkish Fed, a slide in consumer confidence to sub-100 would weigh on riskier assets.

On Thursday, the focus will shift to the weekly jobless claims and finalized Q1 GDP numbers. The jobless claims should have more influence, barring any revisions to the GDP numbers.

However, the Core PCE Price Index and personal spending/income numbers will likely have the most impact. Better-than-expected US personal spending/income figures and sticky inflation would support Fed Chair Powell’s two-rate hike outlook.

Other stats include housing sector numbers and finalized Michigan Consumer Sentiment figures that should have a limited impact on the dollar.

Fed chatter will need consideration, with Fed Chair Powell speaking on Wednesday.

From China, NBS private sector PMIs will also need consideration. A deeper contraction across the manufacturing sector would spook the markets but could fuel speculation of a Beijing stimulus package.