EUR/USD Forecast: ECB dovish hike and hotter US inflation taking their toll

EUR/USD Current Price: 1.0673

• The European Central Bank delivered a dovish 25 bps rate hike.
• US wholesale inflation came in hotter than anticipated in August.
• EUR/USD plunges with ECB and US data, lower lows in the docket.

The EUR/USD pair held inside a tight intraday range throughout the first half of Thursday, with the pair stable around 1.0730 ahead of the main event of the day, the European Central Bank (ECB) monetary policy decision.

After the release of the United States (US) Consumer Price Index (CPI), financial markets turned modestly optimistic on Wednesday. Inflation in the US was not as encouraging as the Federal Reserve (Fed) may have wanted, but it fell short of affecting monetary policy decisions enough to underpin the sentiment.

The ECB hiked rates by 25 basis points (bps), which was not much of a surprise as market players were somehow expecting such an announcement against analysts' odds. The EUR/USD pair fell below 1.0700 with the news, as despite the hawkish decision, the accompanying statement was dovish. "The governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return."

Furthermore, the central bank upwardly revised inflation for this year from 5.4% to 5.6% and from 3% to 3.2% for 2024. Growth, on the other hand, has been downwardly revised. ECB now expects the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.

The pair accelerated its slump following the release of US data, as Retail Sales rose 0.6% MoM in August, much better than the 0.2% anticipated. At the same time, the Producer Price Index (PPI) jumped to 0.7% MoM and 1.6% YoY in August, higher than expected. US Treasury yields advanced with the news, with the 2-year note offering 5.01% and boosting demand for the American dollar.

EUR/USD short-term technical outlook

The EUR/USD pair plummeted to 1.0654, its lowest since last May. The daily chart for the pair shows that the bearish case is strong, as EUR/USD slid further below its moving averages, with the 20 Simple Moving Average (SMA) accelerating south below the longer ones. At the same time, technical indicators gain downward momentum within negative levels, in line with lower lows.

In the 4-hour chart, technical indicators head south almost vertically, with the Relative Strength Index (RSI) indicator approaching oversold readings. A now bearish 20 SMA contained the upside while developing below the longer ones, all anticipating another leg south.

Support levels:  1.0645  1.0605 1.0560

Resistance levels: 1.0720 1.0770 1.0810

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