EUR/USD Weekly Forecast: US Dollar momentum depending on CPI data

The US Dollar kick-started the year on a strong footing, appreciating against most major rivals. The EUR/USD pair fell to 1.0876, further retreating from its late December peak of 1.1139, and heads into the weekend trading at around 1.0980.

Financial markets returned from the winter holidays and are looking for fresh direction. Speculative interest took some profits out of the table after thin trading helped EUR/USD reach a multi-month high. But investors also chose to reduce bets on upcoming rate cuts after macroeconomic figures confirmed the economic contraction extended into December 2023, while inflation in the Eurozone remained elevated at the end of the year.

Concerning macroeconomic developments

On the one hand, S&P Global released the final estimates of its December Producer Manager Indexes (PMIs), which showed manufacturing and services output remained below 50 - the line that separates contraction from expansion- in the European Union (EU) and the United States (US). The latter published the official ISM PMIs, with the manufacturing index printing at 47.4 and the services one resulting in 51.4, which provides some support to the US Dollar.

On the other hand, Germany unveiled the preliminary estimate of the Harmonized Index of Consumer Prices (HICP), which unexpectedly jumped to 3.8% YoY in December, according to preliminary estimates. At the same time, the EU HICP rose 2.9% in the year to December, much higher than the previous 2.4%. Finally, German Retail Sales plunged by 2.5% MoM in November, much worse than anticipated.

Restricted growth but still high inflation could affect central banks’ decisions. The idea of slower progress is welcome as long as it comes by the hand of easing price pressures. The aforementioned figures suggest the European Central Bank (ECB) should stick to the “higher for longer” mantra, as additional rate hikes risk a steep recession. Across the pond, however, the Federal Reserve (Fed) seems to be dealing with a slightly better situation, but macroeconomic figures are falling short of suggesting a rate cut in the first quarter of the year.

Speaking of which, the Federal Open Market Committee (FOMC) unveiled the Minutes of the December meeting. Officials noted that “the policy rate is likely at or near its peak for this tightening cycle,” not actually a surprise after three consecutive on-hold decisions. Also, the document showed policymakers believe a rate cut is possible in 2024 but gave no hints on when or how it might occur.   

US labor market remains tight

A critical clue on where the Fed is heading next came from the labor sector. The US published multiple employment-related figures, including the ADP survey and the Nonfarm Payrolls (NFP) report. ADP indicated that the private sector added 164K new positions in December, much higher than the 115K anticipated by market participants. The NFP report showed the country created 216K new jobs in December, while the Unemployment rate held steady at 3.7% according to the US Bureau of Labor Statistics (BLS), both readings beating expectations. Average Hourly Earnings climbed 4.1% YoY up from 3.9% in November. The upbeat report gave the US Dollar a near-term boost, as it means the Fed would need to maintain rates at current levels for longer than previously anticipated.

The upcoming week will bring fresh clues on US price pressures. The country will release next Thursday the December Consumer Price Index (CPI), foreseen up by 0.2% MoM. On Friday, it will be the turn of the Producer Price Index (PPI) for the same month, expected to post a modest 0.2% monthly increase. EU November Retail Sales stand out in the European macroeconomic calendar.

EUR/USD technical outlook

From a technical point of view, the EUR/USD pair is ending the week with substantial losses, and while bears dominate, they are still lacking control. The weekly chart shows the pair met sellers around a flat 200 Simple Moving Average (SMA) late in December but develops far above mildly bearish 20 and 100 SMAs. Technical indicators, in the meantime, have turned marginally lower within positive levels, still far above their midlines.

In the daily chart, however, the risk of another leg south has increased. EUR/USD is battling to recover above a bullish 20 SMA, which limits the upside at around 1.0950. A directionless 200 SMA provides support at around 1.0845, the first level to beat to the downside next week. Finally, technical indicators seesaw around their midlines, lacking clear directional strength.

EUR/USD needs to recover the 1.1000 threshold to shrug off the negative stance, with resistance then at 1.1060 and 1.1120. Below 1.0900, the aforementioned 1.0845 is the immediate support level, with a break below it exposing the 1.0760 area.