EUR/USD Weekly Forecast: Call off the correction, dollar bulls are back

The EUR/USD pair extended its rally throughout the first half of the week but failed miserably around parity and finished it at around 0.9750, posting a modest weekly loss. Optimism ruled at the beginning of the last quarter of the year, with Wall Street posting whopping gains and government bonds retaining the previous week’s gains.

EUR/USD supported by risk appetite

Risk appetite resulted from market players´ belief that the mounting risk of a global recession would force central banks to slow their pace of quantitative tightening sooner rather than later. The Reserve Bank of Australia hiked the cash rate by 25 bps, less-than-anticipated, fueling such speculation alongside demand for high-yielding assets.

But the upbeat mood did not last long. The shared currency began shedding ground on Wednesday as the EU announced another round of sanctions on Russia due to its invasion of Ukraine in February. Sanctions came after the illegal annexation of Donetsk, Luhansk, Kherson, and Zaporizhzhia regions and included a price cap on Russian oil, alongside restrictions for imports and exports from and to the country.

Trouble looms in the European Union

Additionally, tepid EU data revived concerns of an economic setback in the Union, cooling the risk-positive sentiment. S&P Global downwardly revised its September PMIs, indicating a steeper contraction in the business sector. At the same time, inflation at wholesale levels in the EU soared in August, up by 43.3% YoY, while Retail Sales in the same month were down 0.3% in the month, while German sales fell by 1.3%.

The shared currency was also affected by the European Central Bank Monetary Policy Meeting Accounts. The document showed some officials preferred a wider rate hike of 50 bps. Additionally, the median three-year inflation expectations held at 3%. Policymakers noted that the EUR depreciation could exacerbate inflationary pressures, adding that acting “decisively” now will prevent the need to hike at a more aggressive pace later.

US Federal Reserve officials more hawkish than ever

The market sentiment deteriorated further after US Federal Reserve speakers hit the wires, repeating their well-known hawkish rhetoric. Minneapolis Fed President Neel Kashkari said they have more work to do on inflation, adding that indeed, there is a risk of overshooting but that they are seeing almost no evidence that inflation has peaked. Charles L. Evans, chief executive officer of the Federal Reserve Bank of Chicago, and Cleveland Federal Reserve Bank President Loretta Mester repeated that inflation is their top priority. Finally, Governor Christopher Waller said he sees little reason to ease the pace of Fed policy tightening.

Meanwhile, US data spurred speculation the US Federal Reserve will maintain its aggressive monetary tightening path. The September Nonfarm Payrolls report showed that the country added 265K new jobs in the month, better than anticipated but below the previous. The Unemployment rate unexpectedly shrank to 3.5%, while the Labor Force Participation Rate declined by less-than-anticipated to 62.3% from 62.4% in August. The report came after a row of discouraging US employment figures.

 On Tuesday, market players learned that the number of job openings drastically decreased in August, while lay-offs and discharges remained above 1.5 million. Additionally, the Challenger Job Cuts report released on Thursday showed that, in September, US-based employers announced 29,989 cuts, up  46.4% from August and 67.7% higher than a year ago. Finally, Initial Jobless Claims for the week ended September 30 unexpectedly increased to 219K, worse than the 200K anticipated.  

Mixed figures still show that the employment sector is strong enough to bear rate hikes.

It’s all about inflation

The upcoming week will have fewer but more interesting scheduled events. The US Federal Reserve will release the Minutes of its latest meeting on Wednesday, while the country will publish the September Consumer Price Index on Thursday. Annual inflation is foreseen up by 8.1%, slightly better than the previous 8.3%. The core reading is foreseen at 6.5%. If it is the case that the CPI eased in August, it would likely have a limited impact on what the market believes the Fed will do. Germany will release the September Harmonized Consumer Price Index, expected to be confirmed at 10.9%. Finally, the focus will be on US September Retail Sales on Friday.

EUR/USD technical outlook

The EUR/USD pair briefly traded above the 61.8% Fibonacci retracement of the 1.0197/0.0535 slide at 0.9945, but it is finishing the week below the 38.2% retracement at 0.9790, which suggests the corrective advance could be over. The pair may well retest and even break below the lower end of the range in the upcoming days.

The weekly chart shows that the pair also faltered just ahead of the daily descending trend line from the year high at 1.1494, which further supports a bearish continuation in the foreseeable future. The 20 SMA maintains a firmly downward slope above the trend line and far below the longer ones. Technical indicators, in the meantime, continue lacking directional strength near oversold readings.

On a daily basis, the risk is skewed to the downside. The pair trades below all of its moving averages, which keep heading south. Technical indicators, in the meantime, resume their declines within negative levels after failing to surpass their midlines.

The 23.6% retracement of the aforementioned daily slump provides immediate support at around 0.9690. The next level to watch is the 0.9600 figure, ahead of the multi-year low of 0.9535.

Sellers will now likely wait at around 0.9870 and 0.9945 ahead of parity. Even if the pair recovers above the latter, it would need to clear the trend line at around 1.0050 to avoid the risk of collapsing.

EUR/USD sentiment poll

The FXStreet Forecast Poll suggests that EUR/USD will likely remain under selling pressure in the following weeks. Bears are a majority in all the time frames under study. On average, the pair is seen stable in the 0.97 area from now until year-end.

The Overview chart paints a gloomy picture for the EUR. The three moving averages head lower, resuming their declines and reaching fresh yearly lows. More relevantly, the monthly and quarterly views show that an increased number of market participants are now foreseeing lower lows for the year sub-0.9500, with potential slides down to 0.9000.