EUR/USD Weekly Forecast: Federal Reserve takes centre stage after ECB decision

The EUR/USD pair reverted early losses and finished just below the 1.1100 mark, little changed for the week. The pair bottomed at 1.1001 mid-week, as the US Dollar (USD) benefited from a risk-averse environment. It finally gave up its early gains on Thursday, following the European Central Bank (ECB) monetary policy announcement and United States (US) inflation figures.

ECB delivers cut but remains cautious

The ECB trimmed the deposit facility rate by 25 basis points (bps) to 3.5% as expected, but at the same time, it cut 60 bps from the marginal lending facility rate and the main refinancing operations one. Despite not directly mentioning it, sluggish economic growth in the Eurozone has been among the main reasons behind the decision.

ECB President Christine Lagarde somehow acknowledged the gloomy scenario as she noted that the recovery continues to face some headwinds, while policymakers also see upward risks for inflation. As a result, officials said they would keep policy rates sufficiently restrictive for as long as necessary to achieve such an aim. Finally, Lagarde repeated that the central bank will keep making decisions meeting by meeting and that their decisions will be data-dependent.

The ECB announcement was broadly in line with the market expectations, having a limited impact on the Euro (EUR). EUR/USD advanced as a result of the US discouraging data.

United States inflation disappoints

The US published the Consumer Price Index (CPI) on Wednesday. The US Bureau of Labor Statistics reported that the annual CPI rose 2.5% year-over-year (YoY) in August, easing from the previous 2.9%. Also, the core annual figure matched the July one and expectations by printing at 3.2%. However, the monthly core increase was higher than anticipated, hitting 0.3%.

On Thursday, the country released the Producer Price Index (PPI) for the same month, which rose by 1.7% from a year earlier, below the 1.8% expected and the previous 2.1%. On a monthly basis, the PPI was up by 0.2%, slightly above the 0.1% anticipated.  

The figures erased hopes for a 50 basis points (bps) interest-rate cut from the Federal Reserve (Fed) when it meets next week. The Fed will likely deliver a modest 25 bps cut, which, by the way, was long ago priced in.

Federal Reserve’s path taking a turn

The US central bank is expected not only to trim interest rates but also to release a fresh  Summary of Economic Projections (SEP), or dot plot. The document anticipates policymakers' views on where growth, inflation, and employment are foreseen in the upcoming years and their intentions on rate changes. The previous SEP was released in June and showed policymakers intended to cut rates by just 25 bps this year. Revisions to such a figure could be a game changer. The higher the intended level of cuts, the more likely the US Dollar will suffer.

Should the Fed surprise with a 50 bps in its September meeting, the USD is also at risk of suffering a steep setback.

The reasoning behind a wider cut is economic progress. Despite the US economy being in much better shape than that of its major rivals, there are still lingering concerns about a soft landing. Recession, at this time, could be too much of a word to use.

Nevertheless, and despite inflation still holding above the Fed’s 2% goal, the economy has been struggling long enough to continue in such a state. It is time for the US to regain its crown.

What else is on the docket

In the upcoming days, the Fed will not be the only central bank to take the stage. The Bank of England (BoE) and the Bank of Japan (BoJ) will also announce monetary policy decisions on Thursday and Friday, respectively, that could impact the USD through the market’s sentiment.

The US will release August Retail Sales ahead of the Federal Open Market Committee (FOMC) announcement, while the Eurozone will publish the final estimate of the August Harmonized Index of Consumer Prices (HICP) and September Consumer Confidence. As for Germany, the country will release the September ZEW Survey on Economic Sentiment and the August Producer Price Index (PPI).

EUR/USD technical outlook  

Technically speaking, the risk for EUR/USD is skewed to the upside. In the weekly chart, the pair briefly fell below a flat 200 Simple Moving Average (SMA), but held above it for a fourth consecutive week. At the same time, the 20 and 100 SMAs keep heading north below the longer one, supporting the bullish case. Technical indicators, in the meantime, advance just modestly within positive levels, with limited directional strength.

The daily chart for the EUR/USD pair shows the pair struggles to extend gains beyond a still bullish 20 SMA. Meanwhile, a mildly bullish 100 SMA advances above a flat 200 SMA around the 1.0890 level. Overall, moving averages suggest buyers hold the grip. Technical indicators, however, reflect limited bullish conviction. The Momentum indicator ticked higher but remains below its 100 line, while the Relative Strength Index (RSI) indicator consolidates around 55.

EUR/USD needs to run past 1.1140 to regain its bullish poise, aiming then to test the 1.1200 threshold. The bullish case will strengthen should the pair establish above the latter. Below the 1.1000 level, on the other hand, the pair could experience a major setback, with not much in the way until the 1.0900 region.

(This story was corrected on September 13 at 17:46 GMT to say that the daily chart shows the EUR/USD struggles to extend gains beyond a still bullish 20 SMA, not 100 SMA.)