EUR/USD Forecast: Euro looks to break out of wedge, but where? US Retail Sales hold the keys

Inflation is easing, but is it a relief or something to worry about? The debate continues raging after US Import Prices surprisingly dropped in Wednesday's report, joining the ease in the Core Consumer Price Index reported on Tuesday. Uncertainty prevents the dollar from falling. 

Federal Reserve Chair Jerome Powell is on "Team Transitory" seeing the drop in prices as a natural result of previous price rises driven by the rapid reopening. That implies tapering of bond buys can wait for longer and a weaker dollar. However, some fear that lower prices now are a result of lower demand triggered by previous price gains – and that demand would disappear. In other words – stagflation. 

The second top-tier data point of the week awaits investors on Thursday – US Retail Sales statistics for August. Economists expect to see another month of declines, and that could dampen the mood and push the safe-haven dollar higher. On the other hand, low expectations imply room for an upside surprise. 

See US August Retail Sales Preview: Can gold turn bullish on a weak print?

EUR/USD's failure to benefit from weak US inflation figures is not only dollar-related. Prices of natural gas are soaring in the old continent, angering consumers and even raising concerns about blackouts during the winter. Even without the worst-case scenario materializing, higher costs for consumers and industry could derail Europe's recovery.

Germany: Political uncertainty about the leadership in Europe's largest country also weighs on sentiment. German Chancellor Angela Merkel is leaving after 16 years, and opinion polls point to a fragmented parliament. Center-left leader Olaf Scholz is seen as the continuation candidate, but it is unclear what coalition he would be able to muster. Citizens have already begun sending votes by mail, ahead of election day on September 26. 

Overall, uncertainty remains significant and that could push the dollar higher. However, upbeat retail sales could cheer markets and send funds away from the safety of the dollar. 

EUR/USD Technical Analysis

Euro/dollar is trading in a narrowing wedge or triangle, and technical textbooks signal higher volatility is underway. To what direction? The Relative Strength Index (RSI) on the four-hour chart and momentum are fairly balanced. The currency pair is trading above the 200 Simple Moving Average (SMA) but just below the 50 and 100 SMAs, pointing to a minor advantage for bears. 

Support awaits at the round 1.18 level, followed by the September low of 1.1770. Further down, 1.1740 and 1.1725 are eyed.

Resistance is at 1.1845,, the weekly high, and then by 1.1860, 1.885 and 1.1910.