EUR/USD Weekly Forecast: Taming inflation, the new global challenge

• European data put pressure on the ECB to take more aggressive measures.
• US inflation sent investors into pricing in a 50 bps rate hike in March.
• EUR/USD further long-term gains are unlikely unless it clears the 1.1500 threshold.

The American dollar struggled to recover some of the ground lost post-ECB’s announcement, succeeding partially.  Soaring inflation and central banks’ responses to it have been the main market catalyst since mid-2021, and that was again what moved the market this week. The US reported the January Consumer Price Index, which soared to 7.5% YoY, its highest since February 1982.

Pressure mounts on the ECB and the Fed

The immediate reaction to the headline was investors rushing to price in a 50 bps rate hike from the US Federal Reserve as soon as March. Also, Wall Street took a turn to the downside, while US government bond yields soared, sending the yield on the 10-year Treasury note to 2.036%, above the 2% threshold for the first time since 2019.

The dollar got some attention from market participants, although the battle between its former bearish trend and a tighter monetary policy continues. The EUR/USD pair trades around 1.1400 after peaking at a fresh 2022 high of 1.1494 on Thursday.

Across the pond, Germany confirmed the January annual CPI at 5.1% YoY. Additionally, the European Commission raised its inflation expectations for this year to 3.5% but is still expecting it to decline in 2023, seeing it at 1.7%. Price pressures were blamed on supply disruption and the energy crisis, exacerbated by geopolitical tensions between Russia and Ukraine. Finally, Bundesbank Governor Joachim Nagel indicated that the European Central Bank might raise rates later this year, all of which put pressure on the European Central Bank to adopt a more aggressive stance on monetary policy.

Confidence is not enough

Other than inflation and central banks, market players got little clues from the macroeconomic calendar. Investor Confidence in the EU improved to 16.6 in February, according to Sentix, while German Industrial Production fell by more than anticipated in December, down 0.3% MoM. US data was encouraging, as the December Goods and Services Trade Balance posted a better-than-anticipated deficit of $80.73 billion. Finally, the preliminary estimate of the February Michigan Consumer Sentiment Index printed at 61.7, much worse than anticipated.

The upcoming week will start with the EU publishing a revision of its Q4 Gross Domestic Product, expected to be confirmed at 0.3% QoQ. Germany will publish the February ZEW Survey on Economic Sentiment, while the US will unveil January Retail Sales, seen up 1.7% MoM. Finally, the FOMC will publish the Minutes of the latest meeting.

EUR/USD technical outlook

The weekly chart for the EUR/USD pair shows that further long-term gains are in doubt. The weekly chart shows that the pair tested and retreated from a mildly bearish 200 SMA and currently hovers around a firmly bearish 20 SMA. Technical indicators in the same chart have retreated from around their midlines, offering modest bearish slopes. Overall, the chart indicates that bulls remain unconvinced.

The daily chart shows that the pair continued to seesaw around a bearish 100 SMA, unable to move away from it. The 20 SMA is directionless at around 1.1340, providing support. Meanwhile, technical indicators have lost their bullish strength and turned marginally lower within positive levels, falling short of suggesting an upcoming decline.

The market is still looking for a trend after digesting the latest central bank updates. The pair can turn bullish once above the 1.1500 figure and extend its gains towards the 1.1620 price zone. On the other hand, a slide below 1.1320 should open the door for a steeper decline towards the 1.1260 level first, followed later by the year low at 1.1120.

EUR/USD sentiment poll

The FXStreet Forecast Poll hints at a bearish continuation in EUR/USD. The pair is seen falling in the thee time-frame under study, with those betting for lower levels up to over 70% in the monthly and quarterly perspectives. On average, the pair is seen holding above 1.1200, with a tight range of possible targets in the monthly view, but a much wider one in the longer perspective. Nevertheless, most targets in every time-frame under study hold between 1.1000 and 1.1400.

The Overview chart shows that the bearish trend continues, despite some consolidation anticipated in the upcoming weeks. The moving averages have lost their previous bullish strength and turned neutral.