EUR/USD Weekly Forecast: To hike or not to hike? Kevin Warsh between a rock and a hard place

The EUR/USD pair settled around 1.1600 for a third consecutive week, unable to find a clear way despite key macroeconomic headlines. The pair held within a tight 100-pip range for the second week in a row, as speculative interest awaits the Federal Reserve (Fed) monetary policy announcement scheduled for Wednesday.

European Central Bank delivered

The European Central Bank (ECB) delivered, as expected, a 25 basis points (bps) interest rate hike. As a result, the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility stood at 2.65%, 2.9% and 2.5%, respectively. The accompanying statement and President Christine Lagarde’s speech that followed the announcement were tilted hawkish, but it was also among investors’ expectations.

President Lagarde refrained from anticipating the next move and repeated that the ECB remains data-dependent and that decisions will be made meeting by meeting. However, she also added that “inflation expectations over shorter horizons remain at elevated levels,” highlighting the risks related to mounting price pressures amid the Middle East war. On a positive note, Lagarde noted that the near-term growth outlook has improved, reflecting resilience of consumption and public investment.

The decision had a limited impact on the Euro, as the announcement fell short of surprising investors.

Middle East remains the main theme

The Middle East war - and soaring Oil prices - are no doubt the main markets’ movers. Crude Oil briefly traded above $100 a barrel before shedding some ground on Friday, still closing the week with solid gains. Additionally, the International Energy Agency (IEA) noted that the global Oil supply deficit is expected to worsen this year, after global Oil inventories fell an additional 95 million barrels in August. The agency does not expect Gulf output to fully recover until next year.

Also, hostilities around the Strait of Hormuz escalated while traffic through the critical sea passage remains heavily restricted. That means inflation is expected to extend its route north and translate into additional monetary policy tightening across the globe, as there are no signs the conflict will end in the foreseeable future.

US Dollar finds strength in inflation

The US Dollar (USD) found short-lived strength on Friday, following the release of the August Consumer Price Index (CPI). Inflation, as measured by the CPI, held at 3.4% YoY as expected, while the core annual figure eased to 2.4% from the previous 2.5%, also meeting expectations. On a monthly basis, the CPI was up 0.4% after advancing by 0.1% in July.

Persistently high inflation, alongside speculation that the Middle East war will continue to push energy prices higher, fuels speculation that the Fed will have to hike the benchmark interest rate at its meeting next week. According to the CME FedWatch Tool, the odds for a 25 bps hike stand roughly at 90% following the release of US CPI figures, up from 72.4% a day before.

Still, after market players digested the news, EUR/USD returned to the 1.1600 price zone. The Greenback remained under near-term pressure following the release of the preliminary estimate of the University of Michigan Consumer Sentiment Index, which fell to 47.8 in September from 51.7 in the previous month. The report also showed that one-year inflation expectations rose to 4.6% from the 4% posted in August.

What’s next on the docket

Other than the Fed announcement, the macroeconomic calendar will feature US August Retail Sales. Across the pond, there won’t be any first-tier releases these days, although ECB President Christine Lagarde will be on the wires on Monday. By the end of the week, the Eurozone will release the final estimate of the August Harmonized Index of Consumer Prices (HICP), expected to be confirmed at 3.3% YoY.

War-related headlines are unlikely to have a relevant impact on financial markets unless there is a sudden interruption of hostilities. At this point, speculative interest believes the war will continue, Oil prices will keep rising, and hence, central banks will lean towards tighter monetary policies. That belief needs to change for the market to react.

EUR/USD Technical Outlook:

Looking at EUR/USD charts, it seems buyers are losing their grip, although sellers are still sidelined. In the daily chart, EUR/USD sits below the 20-day Simple Moving Average (SMA) at 1.1628 and the 200-day SMA at 1.1634, but still above the 100-day SMA at 1.1559. The longer moving averages lack clear directional strength, reflecting a lack of definition, while the shorter one, aiming higher yet above the current level, fails to suggest another leg north. At the same time, the Momentum indicator is flat just below its midline, while the Relative Strength Index (RSI) indicator aims lower at around 53, hinting at fading upside pressure and mounting selling pressure.

In the weekly chart, EUR/USD is neutral-to-bullish. The pair remains above the 20-week SMA at 1.1557, having met buyers around the level multiple times in the last few days. The 100- and 200-week SMAs at 1.1343 and 1.1082 sit far below the current price, reinforcing a medium-term supportive backdrop. Technical indicators, in the meantime, hover around their midlines without clear directional strength.

On the topside, initial resistance appears at the 20-day SMA near 1.1628, with the 200-day SMA at 1.1634 reinforcing a tight supply zone that bulls must clear to revive a more constructive tone. A clear break above weekly tops at 1.1569 should open the door for a steeper advance towards the 1.1700 region. On the downside, initial support is located at the 20-week SMA around 1.1557, with a daily close below it exposing a long-term static support in the 1.1470 price zone. Further declines expose the 1.1400 threshold, while once below the latter, the bearish case will become stronger.

(The technical analysis of this story was written with the help of an AI tool. Know more.)