EUR/USD Forecast: Buying opportunity? Weak US inflation and ECB optimism may replace current gloom

Blame China – a trick applied by American politicians of all colors may explain dollar resilience in face of weak US inflation figures. However, as with political tricks, it does not tell the whole story and the narrative is ever-changing. 

The US Core Consumer Price Index (Core CPI) missed expectations with 4% YoY in August against 4.2% expected. The climb down in costs of used cars explains part of the cooling and initially sent the dollar down. Lower inflation means less pressure on the Federal Reserve to taper down its bond-buying scheme. The bank buys $120 billion per month.

US Inflation Analysis: Team Transitory wins, dollar loses, why the trend may extend

Fed Chair Jerome Powell's insistence that inflation is transitory – a result of the rapid reopening – has been vindicated. However, underlying prices remain elevated, and the debate about the direction of inflation and the broader economy remains uncertain. Some fear a "stagflationary shock" – where higher prices deter buyers and eventually kill demand and cause a slowdown.

US Consumer Price Index: Is stagflation next?

News from Beijing is also taking its toll. Retail sales in the world's second-largest economy grew by only 2.5% YoY and industrial output advanced by 5.3%, both under expectations. China's ongoing backlash against its tech companies – and most recently gambling ones – is adding to the gloom and supporting the safe-haven dollar. North Korea's firing of long-range missiles for the second time also adds to concerns. 

Will the downbeat mood continue and boost the dollar? Not necessarily. Wall Street investors are conditioned to "buy the dip" and the prospects of more Fed dollars support additional gains. In turn, the greenback has room to retreat. 

In the old continent, there are reasons to be optimistic – at least according to European Central Bank President Christine Lagarde, who said that she foresees a return to pre-pandemic output levels sooner than later. Moreover, European COVID-19 cases are falling while vaccinations are rising – having an advantage over the US.

Overall, there is room for EUR/USD to recover sooner rather than later. 

EUR/USD Technical Analysis

Euro/dollar has dropped below the 100 Simple Moving Average on the four-hour chart but is holding above the 200 SMA. While momentum remains to the downside, it is not strong. Overall, the picture is mixed. 

Some support awaits at the daily low of 1.18. It is followed by the September trough of 1.1770, followed by 1.1740, 1.1725, and 1.1690.

Resistance awaits at 1.1845, Tuesday's peak, followed by 1.1860, 1.1885 and 1.1910.