EUR/USD Forecast: Euro sellers retain control ahead of key inflation data
- EUR/USD trades slightly below 1.0400 in the European session on Friday.
- Inflation data from Germany and the US will be watched closely.
- The technical outlook points to a bearish shift in the near term.
EUR/USD closed in negative territory for the third consecutive day on Thursday and continued to edge lower early Friday. The pair's near-term technical outlook points to a bearish shift as investors await inflation data from Germany and the US.
Euro PRICE This week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the weakest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 1.21% | 0.62% | -0.71% | 0.77% | 1.48% | 0.99% | 0.67% | |
| EUR | -1.21% | -0.51% | -1.75% | -0.29% | 0.27% | -0.10% | -0.43% | |
| GBP | -0.62% | 0.51% | -1.57% | 0.22% | 0.79% | 0.43% | 0.08% | |
| JPY | 0.71% | 1.75% | 1.57% | 1.54% | 2.39% | 1.96% | 1.54% | |
| CAD | -0.77% | 0.29% | -0.22% | -1.54% | 0.51% | 0.22% | -0.13% | |
| AUD | -1.48% | -0.27% | -0.79% | -2.39% | -0.51% | -0.33% | -0.66% | |
| NZD | -0.99% | 0.10% | -0.43% | -1.96% | -0.22% | 0.33% | -0.56% | |
| CHF | -0.67% | 0.43% | -0.08% | -1.54% | 0.13% | 0.66% | 0.56% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).
Following the January meeting, the European Central Bank (ECB) announced that it lowered key rates by 25 basis points (bps), as expected. The ECB refrained from making any significant changes to its policy statement. In the post-meeting press conference, ECB President Christine Lagarde didn't offer any fresh clues on the interest rate outlook, reiterating that their next decision will be driven by data and analysis.
Meanwhile, the US Bureau of Economic Analysis (BEA) reported on Thursday that the Gross Domestic Product (GDP) expanded at an annual rate of 2.3% in the fourth quarter. This reading followed the 3.1% expansion recorded in the third quarter and came in below the market estimate for a growth of 2.6%. On a positive note, weekly Initial Jobless Claims in the US declined to 207,000 in the week ending January 25 from 223,000 in the previous week. After edging lower with the immediate reaction to these data, the US Dollar (USD) benefited from the cautious market mood and regathered its strength, causing EUR/USD to turn south in the American session.
Later in the day, Consumer Price Index data from Germany and Personal Consumption Expenditures (PCE) Price Index figures from the US will be watched closely by market participants.
In Germany, the annual CPI inflation is forecast to stay unchanged at 2.6%. An unexpected increase could support the USD with the immediate reaction. On the other hand, the core PCE Price Index in the US is seen rising by 0.2% on a monthly basis in December. A monthly core PCE inflation reading of 0.3% higher could boost the USD heading into the weekend.
EUR/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the four-hour chart stays below 50 and EUR/USD closed below the 50-day Simple Moving Average (SMA) for the third consecutive day on Thursday, reflecting a bearish shift in the short-term outlook.
In case EUR/USD drops below 1.0380-1.0390 (200-period SMA on the 4-hour chart, Fibonacci 50% retracement of the latest downtrend) and starts using this level as resistance, additional losses toward 1.0350-1.0360 (Fibonacci 38.2% retracement, 100-period SMA) and 1.0300 (static level, round level) could be seen.
Looking north, resistance levels could be spotted at 1.0440 (Fibonacci 61.8% retracement), 1.0500-1.0510 (round level, Fibonacci 78.6% retracement) and 1.0540 (static level).
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
