EUR/USD Weekly Forecast: Looming Central Banks’ decisions to dent the market’s mood
- The US Dollar resumed its advance after data showed the US economy remains healthy.
- Looming European Central Bank’s and Federal Reserve’s meetings fuel a cautious mood.
- EUR/USD nears a bearish breakout point after flirting with year-to-date highs around 1.1200.
The EUR/USD pair was unable to conquer the 1.1200 mark, and after flirting with the level at the beginning of the week, it entered a downward corrective spiral that resulted in the pair ending the week not far above the 1.1053 low.
US Dollar reclaims its crown
The US Dollar remained under pressure until Wednesday, when a souring market mood spurred demand, later fueled by upbeat macroeconomic figures. On Thursday, the United States (US) reported that the annualised Gross Domestic Product (GDP) growth for the second quarter was 3%, higher than the previously estimated 2.8%. Furthermore, unemployment claims rose by less than anticipated in the week ended August, printing at 231K. Finally, the US published the July Personal Consumption Expenditures (PCE) Price Index on Friday, which remained steady at 2.5% YoY, slightly better than the 2.6% anticipated. On a monthly basis, the PCE Price Index rose 0.2%, matching expectations. The annual core PCE Price Index rose 2.6%, slightly better than the 2.7% expected but matching the June outcome.
Not only did the figures match expectations, but they also had no impact on speculation about by how much the Federal Reserve (Fed) would trim interest rates when it meets in September. The figures do not shed light on whether American policymakers will go for a 25 or 50 basis points (bps) cut, which is the only pending uncertainty among speculative interest.
A resilient US economy may not be a surprise but indeed is welcomed news. The fact that speculative interest has already priced in an interest rate cut alongside upbeat macroeconomic outcomes fueled demand for the USD currency at the end of the week.
Eurozone inflation supporting ECB’s path
Things also improved in the Eurozone, as Germany released the preliminary estimates of the August inflation data, which surprised investors by falling more than anticipated. The Consumer Price Index (CPI) rose 1.9% YoY, below the 2.1% anticipated, while the CPI was down 0.1% compared to the previous month. The broader Harmonized Index of Consumer Prices (HICP) increased by 2.0% in the year to August and fell by 0.2% compared to July.
The Eurozone HICP, however, met expectations, rising by 2.2% in August, down from the 2.6% posted in July. The monthly increase printed at 0.2%, higher than the previous 0.0%. Finally, the core annual HICP hit 2.8%, meeting estimates.
The figures support the case for another European Central Bank (ECB) rate cut in September, something speculative interest has already priced in.
Data-release intensifies
The upcoming week will bring some relevant macroeconomic figures ahead of central banks’ announcements. The ECB will decide on monetary policy on September 12, while the Federal Reserve Fed will do the same on September 18.
The US calendar will feature the August ISM Manufacturing Purchasing Managers Index (PMI) on Tuesday, with the index foreseen at 47.8, improving from the 46.8 posted in July. The Services PMI will be out on Thursday and is expected at 51.5.
Also, the country will release employment-related figures throughout the week, including JOLTS Job Openings, the ADP Employment Change report, and Challenger Job Cuts, ahead of the August Nonfarm Payroll (NFP) report on Friday. At the time being, the country is expected to have added 163K new jobs in the month after gaining 114K in July. The Unemployment Rate is foreseen at 4.2%, down from the previous 4.3%.
The Eurozone will also offer some interesting figures, as it will publish July Producer Price Index (PPI) figures, Retail Sales for the same month, and a Gross Domestic Product (GDP) update. As for Germany, the focus will be on Factory Orders and Industrial Production for July.
EUR/USD technical outlook
The corrective decline could continue should EUR/USD extend its slide below the 1.1050 region. The weekly chart shows that the pair is battling to hold above a mildly bearish 200 Simple Moving Average (SMA), after breaking above it for the first time in over a year last week. The 20 and 100 SMAs maintain their bullish slopes well below the current level, limiting the odds for a steeper decline but being little relevant at the time being. Finally, technical indicators aim south within positive levels, skewing the risk to the downside.
The daily chart for EUR/USD shows the downward momentum is building up. Technical indicators head firmly lower, retreating from extreme overbought readings but still holding above their midlines. A bullish 20 SMA stands around 1.1045, further supporting the case of a bearish extension once the area gives up. Finally, the 100 and 200 SMAs maintain modest upward slopes but are too far below the current level to be relevant.
An extension below 1.0990 could see the pair falling towards 1.0950 en route to the 1.0910 region. On the other hand, resistance can be found at 1.1100 and 1.1145, with a clear advance above the latter exposing the 1.1200 threshold.
Economic Indicator
Nonfarm Payrolls
The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.
Read more.Next release: Fri Sep 06, 2024 12:30
Frequency: Monthly
Consensus: 163K
Previous: 114K
Source: US Bureau of Labor Statistics
America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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Author
Valeria Bednarik
FXStreet
Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.
