EUR/USD Forecast: Euro claws out of the abyss, long list of worries could send it back down

New quarter, new direction? Not so fast – EUR/USD has bounced off the lows, but there are good reasons to believe its upswing would be limited. 

The minor increase may be attributed to profit-taking on dollar longs and also expectations that eurozone inflation figures exceed estimates. The preliminary Consumer Price Index (CPI) for September is set to show an annual increase of 3.3%, up from 3% in August. That could push the European Central Bank toward reducing its bond purchases, thus boosting EUR/USD. Everything else is pointing down. 

One of the reasons for higher European inflation is soaring prices of natural gas – and that could choke the recovery from the pandemic. Costs are climbing ahead of the winter and leave consumers with less money in their pockets. China, also suffering from an energy crunch, aims to avoid power outages and ordered provinces to accumulate various fuels "at all costs" – adding to worries. 

In the US, lawmakers averted a last-moment government shutdown but the clock continues ticking toward hitting the debt ceiling – potentially in around two weeks. An American default on debt seems unthinkable, but markets remain nervous while Republicans object to raising the limit.

Infighting within the Democratic Party is also weighing on sentiment and boosting the safe-haven dollar. House Speaker Nancy Pelosi was forced to withdraw a vote on the bipartisan infrastructure bill as the progressive wing of her party opposes backing it without guarantees on the larger spending legislation worth around $3.5 trillion.

Two critical data points await traders later in the day. The Core Personal Consumption Expenditure (Core PCE) is the Federal Reserve's preferred gauge of inflation and is set to show some moderation. However, it would probably take a significant plunge to make the bank rethink its upcoming tapering. Fed tightening has been driving the dollar higher. 

See US Core PCE Preview: Only a sharp fall in the Fed's favorite gauge could dethrone King Dollar

The second release is the ISM Manufacturing Purchasing Managers' Index. Economists expect this measure of the industrial sector to remain at elevated levels, thus supporting the taper decision. The Prices Paid component could resume its rises and the Employment one serves as a hint toward next week's Nonfarm Payrolls.

Overall, it is hard to see the mood immediately improving and the Fed backing off tapering – and that is a recipe for more dollar gains.

EUR/USD Technical Analysis

The Relative Strength Index on the four-hour chart is just below 30, thus in oversold territory. That implies a bounce is imminent, yet it could be short-lived. Euro/dollar is suffering from significant downside momentum and trades well below the 50, 100 and 200 Simple Moving Averages. 

Support awaits at the new 2021 trough of 1.1560, followed by 1.1510 and 1.1450. 

Some resistance is at 1.1610, where a recovery attempt was thwarted on Thursday. Further above, 1.1660 and 1.1680 are awaited.