EUR/USD Weekly Forecast: First signs of an interim bottom

The EUR/USD pair fell to a fresh multi-year low of 0.9898, its lowest since December 2002, but managed to trim its weekly losses and settled at around 1.0050, marginally higher in the week. The dollar rallied at the beginning of the week but lost steam afterwards, despite a cautious mood in financial markets.

Market players were waiting for clues coming from economists and policymakers gathered at the Jackson Hole Economic Symposium. The event started on Thursday, and it would extend during the weekend.

US Federal Reserve chief Jerome Powell delivered the opening remarks on Friday and repeated his well-known message. The Fed’s focus remains on price stability, noting that “reducing  inflation is likely to require a sustained period of below-trend growth,” and it will require maintaining a restrictive policy stance for “some time.”  

Powell’s words pushed the greenback further lower and helped EUR/USD to reach a fresh weekly high, but also boosted chances of a 75 bps rate hike in September. It’s clear that the central bank’s only target is to get a grip on inflation, despite the damage it can do to the economy.

Markets should not be ignoring European woes

Meanwhile, the EU and Iran are undergoing negotiations to restore the 2015 nuclear deal, including the US. The latter withdrew under Trump’s administration while imposing sanctions on Tehran. These days, the Union needs to revive the deal to replace the energy supply lost by Russia amid European sanctions on the country due to the Ukraine invasion. All parties involved are extremely cautious in their communications, but overall, progress is being made.

The situation in Ukraine, however, is on the other side of the spectrum. The war continues, with the latest on the matter being an energy disruption to the nuclear plant at Zaporizhzhia. Kyiv and Moscow blame each other for the event, although Ukraine reported energy had been restored.

Why does it matter? Well, firstly, the Western world imposed sanctions on Russia, with the latter responding by cutting gas and oil provisions to the Union. That’s leading to an energy crisis in the Old Continent, threatening shortages for the upcoming winter. At the same time, prices are skyrocketing, fueling already out-of-control inflation. Also, a nuclear plant without power could end up being another Chernobyl.

Growth and inflation in the eye of the storm

But mostly, the focus remains on economic growth. Macroeconomic figures released these days have been mixed, although most were seen as “encouraging,” providing support to high-yielding assets. But the delicate situation in Europe could break the thread from where confidence hangs anytime. That’s why despite shedding some ground, the safe-haven greenback remains near its recent multi-month highs across the FX board.

S&P Global released the preliminary estimates of its August PMIs, with most European indexes beating expectations but signaling contractions. In the US, however, there was a sharp contraction in services output, with the index plummeting to 44.1. However, Gross Domestic Product revisions came in better than initially anticipated, with the German Q2 reading upgraded to 0.1% and the US to -0.6%.

More good news came from US inflation, as the July core PCE Price Index rose a modest 0.1% MoM by 4.6% YoY – below the market expectations and the June figures and signaling easing inflationary pressures. Finally, the August US Michigan Consumer Sentiment Index was confirmed at 58.2 – better than anticipated.

The upcoming week will bring the preliminary August inflation estimates for Germany and the EU, while the US will publish the monthly Nonfarm Payroll report and the official August ISM Manufacturing PMI.

EUR/USD technical outlook

The EUR/USD pair trades at around 1.0050, and the weekly chart gives a first hint of an interim bottom, although the risk remains skewed to the downside. The current candle has a long downward wick and, despite being flat, the pair is at its weekly high. The same chart shows that technical indicators maintain their bearish slopes below their midlines, while the 20 SMA heads firmly lower at around 1.0410 while developing roughly 1,000 pips below the longer ones. Finally, a daily descendant trend line coming from this year’s high at 1.1494 stands for the upcoming days in the 1.0260 area, a potentially bullish target.

The daily chart shows that the pair is firmly up but also that the bullish potential remains limited. Technical indicators extend their recovery from near overbought readings, and while they maintain their upward slopes, they are still within negative levels. At the same time, a bearish 20 SMA provides dynamic resistance, currently at around 1.0140.

Beyond the aforementioned level, the pair could extend its recovery towards 1.0260, while gains above the latter should confirm the bottom. On the other hand,  renewed selling pressure below the 1.0000 threshold will once again open the door for lower lows below the 0.9900 threshold.

EUR/USD Sentiment poll

The FXStreet Forecast Poll shows that the EUR/USD pair may remain under pressure in the near term but will likely recover afterwards. Bears dominate the weekly view, standing at 62% and with an average target of 0.9992. The tie changes in the monthly perspective, with bulls up to 56% and the pair seen above 1.0100 on average. Buyers seem to be in control of the quarterly view, with the pair seen averaging 1.0176. It is worth noting that the number of those betting for lower levels declines as time goes by.

The Overview chart shows that the weekly and monthly moving averages are heading lower, although with modest bearish slopes as fresh bets above the current level appeared. The monthly moving average is flat, as the spread of potential targets is quite even. Still, fresh bets above 1.1000 have appeared, although those looking for lower lows are still present.