EUR/USD Weekly Forecast: The German Economy, US Inflation, and Central Bank Chatter

Highlights

• The EUR/USD declined by 0.88% in the week ending January 5, closing the week at $1.09409.
• Euro area inflation and the German economy are focal points for the ECB in the week ahead.
• The US CPI Report and producer prices also warrant investor attention.

Weekly Overview of the EUR/USD in the Week Ending January 5, 2024

In the week ending on January 5, the EUR/USD declined by 0.88%, closing the week at $1.09409. The EUR/USD rose to a Tuesday high of $1.10388 before sliding to a Friday low of $1.08767.

EUR/USD Analysis: Euro Area Inflation and the German Economy

On Monday, the German economy will be in the spotlight. Factory orders and trade data for November will garner investor interest. Recent private sector PMI and retail sales figures fuelled expectations of a euro area recession. Another fall in factory orders and weaker trade terms would align with bets on a euro area recession.

Economists forecast the German trade surplus to widen from EUR17.8 billion to EUR17.9 billion. Significantly, economists predict factory orders to increase by 1.0% after sliding by 3.7% in October.

German industrial production numbers will draw investor interest on Tuesday. The manufacturing sector accounts for less than 30% of the German economy. However, a weak demand environment would be a red flag for the German and euro area economies. Economists predict a 0.2% increase in production, following a 0.4% decline in October.

On Friday, finalized euro area inflation numbers and French consumer spending need consideration. Upward revisions to preliminary French and Spanish inflation would align with ECB warnings about higher for longer interest rates. However, another fall in consumer spending could give the ECB a reason to begin discussing rate cuts.

A downward trend in consumer spending would dampen demand-driven inflationary pressures. Last week, Germany reported a 2.5% slide in retail sales.

While the stats will influence EUR/USD trends, investors must consider ECB commentary. ECB Chief Economist Philip Lane (Fri) is on the calendar to speak. Executive Board members Isabel Schnabel and Luis de Guindos will also deliver speeches on Wednesday.

US Dollar Update: US Inflation and Fed Speakers

On Thursday, the US CPI Report could be the decisive factor in bets on a Q1 Fed rate cut. Hotter-than-expected consumer price inflation figures could force the Fed to delay rate cuts until May.

An elevated interest rate environment would impact borrowing costs and disposable income. Downward trends in disposable income would curb consumer spending and dampen demand-driven inflation.

Economists forecast the US annual inflation rate to rise from 3.1% to 3.2% in December.

On Friday, US producer prices also warrant consideration. An upward trend in producer prices could reflect an improving demand environment. Producers raise prices when competition decreases due to rising demand. Producer prices are a leading indicator of consumer price inflation.

Economists forecast producer prices to increase by 1.3% year-over-year in December versus 0.9% in November.

Other stats include trade and weekly jobless claims. However, barring a marked increase in US jobless claims or trade deficit, the numbers will likely play second fiddle to the inflation data.

Beyond the numbers, FOMC member commentary needs monitoring. FOMC members Bostic (Mon), Williams (Wed), and Kashkari (Fri) are on the calendar to speak. Reactions to the US Jobs Report and inflation figures would move the dial.

Short-Term Forecast:

The near-term trends for EUR/USD hinge on the US CPI Report. Hotter-than-expected US inflation numbers could cut bets on a Q1 Fed rate cut and tilt monetary policy divergence toward the US dollar.

EUR/USD Price Action

Daily Chart

The EUR/USD held above the 50-day and 200-day EMAs, affirming bullish price signals.

A EUR/USD return to the $1.10 handle would support a break above the $1.10720 resistance level. A EUR/USD move through the $1.10720 resistance level would bring the $1.11 handle into play.

The German economy, inflation, and central bank commentary are focal points.

However, a fall through the $1.09294 support level and the 50-day EMA would bring the 200-day EMA and $1.07838 support level into play.

The 14-period Daily RSI at 50.46 suggests a EUR/USD return to the $1.11 handle before entering overbought territory.

4-Hour Chart

The EUR/USD sat below the 50-day EMA while holding above the 200-day EMA, sending near-term bearish but longer-term bullish price signals.

A EUR/USD break above the 50-day EMA would give the bulls a run at the $1.10720 resistance level and the $1.11 handle.

However, a fall through the $1.09294 support level and the 200-day EMA would bring the $1.07838 support level into play.

The 14-period 4-Hourly RSI at 44.85 indicates a EUR/USD fall through the 200-day EMA before entering oversold territory.