The EUR/USD Weekly Forecast: Private Sector PMIs and the ECB

Highlights

• The EUR/USD declined by 0.47% in the week ending January 19, closing the week at $1.08971.
• US economic indicators and Fed speakers sank bets on a March Fed rate cut.
• Private sector PMIs, US inflation numbers, and central bank speakers are focal points in the week ahead.

Weekly Overview of the EUR/USD in the Week Ending January 19, 2024

In the week ending on January 19, the EUR/USD declined by 0.47%, ending at $1.08971. The EUR/USD rose to a Monday high of $1.09674 before falling to a Wednesday low of $1.08444.

EUR/USD Analysis: Sentiment, Private Sector PMIs, and the ECB

On Tuesday, flash Eurozone consumer confidence needs consideration. An unexpected fall in consumer confidence could signal a weaker consumer spending outlook. Private sector consumption accounts for over 50% of the Euro area economy. A weaker spending outlook could raise the threat of a Eurozone recession. However, a softer consumption outlook could ease demand-driven inflationary pressures. Softer inflation could allow the ECB to begin discussions on rate cuts.

Economists forecast the Eurozone Consumer Confidence Index to increase from -15.0 to -14.0 in January.

Private sector PMIs warrant investor attention on Wednesday. Preliminary PMIs for France, Germany, and the Eurozone will influence sentiment toward ECB interest rate goals. The services PMI figures will have more impact. The services sector accounts for over 60% of the Eurozone economy. Importantly, the services sector contributes most to inflation. Investors must consider the sub-components, including prices and employment.

Economists forecast the Eurozone Services PMI to increase from 48.8 to 49.0.

French and German business confidence numbers will draw investor attention on Thursday. Amidst rising concerns about the German economy, the German Ifo Business Climate Index may have more influence.

A pickup in business confidence could signal an improving macroeconomic environment. Wage growth and private consumption trends hinge on business conditions and job creation trends. A marked improvement in business confidence could support ECB plans to delay interest rate cuts.

Economists forecast the German Ifo Business Climate Index to increase from 86.4 to 86.7 in January.

On Friday, the German economy will be in the spotlight again. The GfK Consumer Confidence Index will need consideration. An unexpected fall in consumer confidence could affect buyer demand for the EUR. A deterioration in consumer confidence could signal a pullback in consumer spending.

The ECB

The euro area stats will draw investor attention. However, the ECB monetary policy decision/press conference is the main event. Economists expect the ECB to leave interest rates unchanged. Uncertainty remains about when the ECB will begin discussing rate cuts. The outlook for inflation, the economy, and interest rates will move the dial.

Beyond the numbers, ECB commentary also needs monitoring before the ECB Press Conference. ECB President Lagarde (Mon/Thurs) is on the calendar to speak.

US Dollar Update: US Services and Inflation

On Wednesday, US preliminary private sector PMIs for January will garner investor interest. The services sector PMI will impact the EUR/USD more. The services sector accounts for over 70% of the US economy. Significantly, a pickup in service sector activity could further reduce bets on a March Fed rate cut.

Economists forecast the S&P Global Services PMI to decline from 51.4 to 51.0. However, investors must consider the prices and employment sub-components.

Q4 GDP, core durable goods orders, and jobless claims warrant investor attention on Thursday. Better-than-expected GDP numbers and a modest increase in jobless claims could support bets on the Fed delaying rate cuts to Q2 2024.

Tight labor market conditions support wage growth and disposable income. Upward trends in disposable income could fuel consumer spending and demand-driven inflation. The Fed could delay rate cuts to curb consumer spending and dampen demand-driven inflationary pressures.

Economists forecast initial jobless claims to increase from 187k to 200k in the week ending January 20. However, economists predict the US economy to expand by 2.0% in Q4 versus 4.9% in the previous quarter.

On Friday, US inflation and personal income/spending figures will conclude another busy week for the US dollar. Sticky inflation and a pickup in personal income and spending would impact investor hopes for a March Fed rate cut.

There are no Fed speeches for investors to consider. The Fed entered the blackout period on Sunday, January 21.

Short-Term Forecast:

The near-term trends for EUR/USD hinge on the private sector PMIs, the ECB, and US inflation. Solid US service sector activity, a more dovish ECB, and sticky US inflation could 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 break above the $1.09294 resistance level would support a move to the $1.10720 resistance level. A EUR/USD move through the $1.10720 resistance level would bring the $1.11 handle into play.

The focal points include services sector PMIs, the ECB, and US inflation.

However, a break below the 50-day EMA would support a fall to the 200-day EMA and $1.07838 support level.

The 14-period Daily RSI at 45.88 suggests a EUR/USD fall to the $1.07838 support level before entering oversold territory.

4-Hour Chart

The EUR/USD sat below the 50-day and 200-day EMAs, sending bearish price signals. Significantly, the 50-day EMA converged with the 200-day EMA. A bearish cross would affirm the bearish near-term price trend.

A EUR/USD break above the EMAs and $1.09294 resistance level would support a move to the $1.10720 resistance level.

However, a break below the $1.08500 handle would support a fall to the $1.07838 support level.

The 14-period 4-Hourly RSI at 51.37 indicates a EUR/USD move to the $1.10720 resistance level before entering overbought territory.