EUR/USD Weekly Forecast: Dovish ECB vs. US Economic Indicators – Who Wins?

Highlights:

• The EUR/USD extended its losing streak to eight weeks, falling 0.70% to $1.06982.
• Markets await the ECB’s monetary policy decision, with little expectation for change this Thursday.
• The Fed’s interest rate trajectory could hinge on US inflation data and retail sales figures.

Overview

In the week ending September 8, the EUR/USD extended the losing streak to eight weeks. The EUR/USD fell by 0.70%. Following a 0.20% decline from the previous week, the EUR/USD closed at $1.06982.

Significantly, the EUR/USD hit a Monday high of $1.08088 before tumbling to a Thursday low of $1.06858.

The ECB Monetary Policy Decision and Press Conference Take Center Stage

Sentiment toward the German and Eurozone economies deteriorated further last week.

German and Eurozone ZEW Economic Sentiment Indicators for August will likely reflect the current macroeconomic environment and grim outlook. A marked decline in the Sentiment Indicators would affirm the EUR/USD near-term bearish trend.

On Wednesday, Eurozone industrial production figures also need consideration. While the manufacturing sector accounts for less than 30% of the Eurozone GDP, a weakening manufacturing sector backdrop would support an ECB hold on monetary policy.

According to the August PMI surveys, the manufacturing and services sectors contracted, leaving the markets to consider economic indicators from both sectors in hopes of a shift in momentum. A pickup in manufacturing sector activity would provide relief.

While the economic indicators will draw interest, the ECB monetary policy decision and press conference will be the main event. Economists expect the ECB to leave monetary policy unchanged on Thursday. Barring a surprise ECB move, the ECB press conference will provide near-term EUR/USD direction.

Investors will respond to ECB President Lagarde’s view on the economy, inflation, and policy outlook.

On Friday, Eurozone wage growth and trade data will influence sentiment toward the ECB policy and economic outlook. We expect the wage growth figures for the second quarter will have more influence on the EUR/USD.

A pickup in wage growth would fuel consumption and demand-driven inflation. The degree of influence will hinge on ECB President Lagarde’s willingness to lift rates higher should wage growth and inflationary pressures persist.

With the ECB in the spotlight, investors should monitor post-Thursday ECB commentary. ECB President Lagarde is on the calendar to speak on Friday.

US Inflation and Consumption to Define the Fed Interest Rate Trajectory

Last week, ISM Non-Manufacturing PMI and labor market numbers fueled bets on further Fed rate hikes. Tight labor market conditions support wage growth. Wage growth counters Fed efforts to curb spending, fuel consumption, and demand-driven inflation.

This week, inflation numbers on Wednesday could raise bets on a final Fed rate hike before hitting the proverbial brakes. However, jobless claims and retail sales figures must align with the tight labor market-consumption relationship to support a Fed hike.

With consumer confidence a key consumption driver, the Michigan Consumer Sentiment survey will also draw interest on Friday.

According to the CME FedWatch Tool, the probability of a September 25-basis point Fed rate hike is 8% (Previous Week: 6%). However, the chance of a 25-basis point November Fed rate hike was 43.6% (Previous Week: 33.5%).

This week’s economic indicators will influence sentiment toward the Fed interest rate trajectory. A dovish ECB hold on monetary policy and better-than-expected US economic indicators would tilt economic and central bank policy divergence more toward the dollar.

EUR/USD Technical Indicators

Daily Chart

The EUR/USD remained below the trend line and the $1.07635 resistance level following the weekly loss.

Weaker-than-expected ZEW Economic Sentiment and industrial production figures would bring sub-$1.0650 and the $1.06342 support level into play. However, we expect the US CPI Report to influence the EUR/USD pair more before the ECB policy decision and press conference.

Hotter-than-expected US inflation numbers would support the near-term bearish trend.

However, the ECB monetary policy decision and press conference will influence near-term EUR/USD trends. A dovish hold on monetary policy and a negative outlook toward the Eurozone economy would leave the EUR/USD on its current bearish trajectory.

A post-ECB press conference fall through the $1.06342 support level would give the bears a look at sub-$1.06.

Considering the 14-Daily RSI at 33.26, the EUR/USD has more room to fall and target sub-$1.06 before entering oversold territory.

4-Hourly Chart

The EUR/USD remains below the trend line and the 50-day and 200-day EMAs, sending bearish price signals. A surprise ECB rate hike or a hawkish ECB press conference would give the bulls a run at the $1.07635 resistance level and 50-day EMA.

However, the 50-day EMA is confluent with the resistance level, signaling selling pressure within the $1.07635 – $1.07659 range.

A dovish ECB hold on monetary policy will bring the $1.06342 support level and sub-$1.06 into play. While the ECB will be the focal point, US economic indicators also need consideration. Monetary policy divergence could materially shift toward the dollar ahead of the Thursday session.

The 14-4H RSI at 34.18 shows the EUR/USD has room to fall to $1.0650 before entering oversold territory