EUR/USD Weekly Forecast: Get ready for a volatile week

• Growth-related data and the ECB’s decision could bring the pair back to life next week.
• Lingering inflation becomes a concern on both shores of the Atlantic.
• EUR/USD is losing bullish potential and could soon reach fresh 2021 lows.

The EUR/USD pair advanced for a second consecutive week, ending it in the 1.1630 price zone. The advance was dull, to say the least, as the shared currency stood away from investors’ radars. EUR/USD added roughly 60 pips over this time to stand not far from the 2021 low at 1.1523.

Yields, inflation and central banks

Last week, a scarce macroeconomic calendar left currency pairs in the hands of market sentiment and US government bond yields. On the one hand, stocks rallied on the back of solid earnings reports, with Wall Street flirting with record highs; on the other, inflation-related concerns sent the yield on the 10-year US Treasury note to 1.70%, its highest since mid-May.

Back in March higher yields used to spur substantially better dollar demand, with that 1.70% threshold being a line in the sand. That’s not the case these days, as higher US Treasury yields are barely enough to offset the risk appetite related to economic growth, as reflected by earnings.  

Lingering US inflation diverges from local policymakers’ view of “temporarily” high. The Consumer Price Index hit an over-a-decade high of 5.4% YoY in September, while inflation expectations – as measured by the 10-year break-even inflation rate, per St. Louis Federal Reserve data, – jumped to 2.64%, the highest since 2012.

Top Federal Reserve officials expresses concerns about extended high inflation and noted it could force the central bank to raise rates sooner than anticipated. That said, Fed Governor Christopher Waller thinks that rate increases are “still some time off” despite thinking the central bank should begin tapering its bond-buying program before year-end. At this point, it is a “done deal” that the Federal Reserve will start reducing its facilities as soon as November, regardless of when it decides to hike rates.

European inflation was confirmed at 3.4% YoY in September, while the core reading for the same period was 1.9%. By the end of the week market participants knew that EU inflation expectations had hit 2% for the first time since 2014, and while it’s far from being a concern, it is adding pressure on a comfortably numb European Central Bank. The ECB’s representatives are in no rush to retrieve financial support.

Growth takes centre stage

On the data front, the US published Initial Jobless Claims for the week ended October 15, surprised by contracting to 290K, the lowest reading since the pandemic began. Yet despite the low number of jobseekers, businesses continue to suffer from a labor shortage. The Labour Department report showed that employment vacancies stood at 10.4 million in August after a record 4.3 million workers quit their jobs. Usually, that’s understood as a sign of confidence in the economy, although such a dynamic changed with the pandemic, with workers instead leaving on the back of covid fears and child care issues. Fed officials are much more optimistic about the employment situation than what actual figures suggest.

Markit, on Friday, published the preliminary estimates of its October PMIs. According to the official report, “Eurozone business activity growth slowed sharply to a six-month low in October amid increasing supply bottlenecks and ongoing COVID-19 concerns, dropping most markedly in manufacturing though also cooling in services.” The Manufacturing Index printed at 58.5, while the Services one came in at 54.7. In Germany, manufacturing output was better than anticipated after hitting 58.2, while the services PMI plunged to 52, its lowest in six months.

US figures were quite encouraging, as the Services PMI improved to 58.2, beating expectations, while the Markit PMI fell to 59.2, missing the 60.3 expected.

The upcoming week will be a busy one, as it includes a couple of first-tier events. Thursday will be a critical day, as the ECB will announce its latest decision on monetary policy, while the US will publish the preliminary estimate of Q3 Gross Domestic Product, the latter foreseen at 3.2% QoQ, roughly half the previous 6.7%. On Friday, the EU will also unveil its Q3 GDP, expected to come out at 1.9%, down from 2.2% in Q2. The Union will also release the preliminary estimate of its October Consumer Price Index, expected to have jumped from 3.4% to 3.7%.

Earlier in the week, Germany will publish the October IFO survey and the November GFK Consumer Confidence Survey, while the US will see the release of CB Consumer Confidence. US Durable Goods Orders are also in the docket, foreseen at -0.2% MoM down from 1.8% in August. Finally, Germany will release the preliminary estimates of its October Inflation data and its Q3 GDP.

EUR/USD technical outlook

The weekly chart for the EUR/USD pair shows the exchange rate topped at 1.1670, the 38.2% retracement of the slump from  1.1908 and 1.1523.  Now the pair is currently hovering around a mildly bullish 100 SMA but over 100 pips below a firmly bearish 20 SMA – a sign that bulls are still side-lined. The RSI and Momentum oscillators are aiming marginally higher within negative levels and below their September highs, reinforcing the idea of bulls lack of interest.

According to the daily chart, EUR/USD is at risk of retreating further. The pair is confined between Fibonacci levels, with the 23.6% retracement of the mentioned slide providing support at around 1.1615. The 20-day SMA is below the current level but retains its firmly bearish slope, as technical indicators hover directionless within neutral levels, and appear to lose their bullish strength. Below the aforementioned support, the pair has room to retest the year low at 1.1523, while a break below the latter exposes a long-term static support area at around 1.1470.

If bulls manage to push the pair above 1.1670, the corrective advance could continue towards 1.1720 first, and then later up to 1.1840.

EUR/USD sentiment poll

The FXStreet Forecast Poll showed that most market participants agree with the bullish exhaustion view. The pair is expected to trade at lower levels than the current price in the three time-frame under study. On average, the pair is seen at around 1.1580 in the three-month perspective.

The Overview chart shows that the near-term moving averages have lost their bullish strength, with the weekly and monthly MA now flat. The longer moving average maintains its sharp bearish slope, as most targets accumulate below the current level.