EUR/USD Weekly Forecast: Focus on US inflation and Eurozone GDP

• Concerns about central banks’ monetary policy decisions keep investors on their toes.
• The United States will release the July Consumer Price Index next week.
• EUR/USD loses upward momentum, but there are no signs of an upcoming slide.

The EUR/USD pair ended the week as it started, trading a handful of pips above the 1.0900 mark. Panic dominated financial markets throughout the first half of the week as investors assessed United States (US) macroeconomic data that spurred recession concerns. The dismal mood was exacerbated by weekend tensions in the Middle East following an Israeli attack on Iranian territory and continued menaces of retaliation from both sides.

Panic coupled with uncertainty hit the US Dollar

Uncertainty related to central banks’ potential decisions on monetary policy also affected the market’s sentiment. The US Dollar plummeted on Monday, resulting in EUR/USD reaching 1.1008, its highest since early January, as market participants started betting the Federal Reserve (Fed) could trim interest rates before the September meeting. Even further, the USD got hit by a soaring Japanese Yen (JPY) following an unexpected 15 basis points (bps) rate hike from the Bank of Japan (BoJ) and hawkish comments from Governor Kazuo Ueda.

Finally, it is worth remembering the European Central Bank (ECB), the Bank of England (BoE), and even the Bank of Canada (BoC) already trimmed interest rates, further prompting fears the Fed may be behind the curve in lowering borrowing costs and avoiding a recession.

Stock markets collapsed, led by a record decline in the Nikkei 225, while government bond yields also edged sharply lower, with the 10-year Treasury yield hitting its lowest in over a year.

Concerns cooled as the week went by, with stocks bouncing and the US Dollar recovering most of its early losses. More relevant, speculative interest withdraws bets on an out-of-schedule rate cut, leaving September odds split between a cut of 25 or 50 bps.

The ongoing calm could be quickly interrupted as it pends by a thread. Speculative interest is still unconvinced about economic progress and the consequences of monetary policy decisions. Sentiment is expected to keep leading the way in the upcoming days and probably increase ahead of the September monetary policy meetings.

Data under scrutiny

The better sentiment was also backed by some encouraging US headlines, as the ISM Services Purchasing Managers Index (PMI) surged to 51.4 in July from the 48.8 posted the previous month, while Initial Jobless Claims for the week ended August 2 decreased to 233K, beating the expected 240K.

Across the pond, the Hamburg Commercial Bank (HCOB) published the final estimate of the Eurozone July PMIs, upwardly revising the EU Composite PMI to 50.2. Additionally, the June Producer Price Index rose by 0.5% month-over-month (MoM) and declined by 3.2% year-over-year (YoY), surpassing the market’s expectations. Finally, Retail Sales in the same month fell by 0.3% MoM, worse than anticipated.

German data, on the other hand, was slightly more encouraging as Factory Orders rose 3.9% MoM in June, while Industrial Production increased by 1.4% in the same month, beating forecasts. Finally, the country confirmed the July Harmonized Index of Consumer Prices (HICP) at 2.6% YoY as previously estimated.

The US will publish the July Producer Price Index (PPI) next Tuesday and the Consumer Price Index (CPI) for the same month a day after. The country will also release Retail Sales data for July and the preliminary estimate for the August Michigan Consumer Sentiment Index.

At the same time, Germany will release the August ZEW Survey on Economic Sentiment on Tuesday, while the EU will publish the second estimate of the Q2 Gross Domestic Product (GDP) and June Industrial Production data on Wednesday.

EUR/USD technical outlook  

The EUR/USD pair weekly chart shows the upward momentum receded. The candle has a long upward wick, usually signaling bulls could not overcome selling interest that is willing to add at higher levels. The same chart shows the pair keeps developing above the 20 and 100 Simple Moving Averages (SMAs), while the 200 SMA provides dynamic resistance at around 1.1070. In the meantime, technical indicators lack directional strength but hold above their midlines, far from suggesting an upcoming slide.

In the daily chart, the EUR/USD pair is neutral-to-bullish. The pair met strong buying interest at around a now flat 20 SMA at 1.0880, which remains above the longer ones. Technical indicators, however, have lost their directional strength. The Momentum indicator hovers just above its 100 line, while the Relative Strength Index (RSI) indicator consolidates at around 59, limiting the bearish potential of EUR/USD.

July monthly high provides immediate resistance at 1.0947, with gains beyond the level aiming to test the 1.1000  area. A break above the latter exposes the 1.1080 price zone.  On the other hand, near-term support can be found at 1.0880, with a more relevant one at 1.0800. A downward acceleration through the latter opens the door for a test of 1.0720.