EUR/USD Analysis: This Week's Events are Fateful
- The EUR/USD exchange rate was on sale after the Eurozone inflation rate came in line with expectations and the unemployment rate in the region unexpectedly fell, but the rise is likely to remain limited.
- Accordingly, the EUR/USD price fell towards the support level of 1.1042, down from the resistance level of 1.1200, which it tried hard to settle above to complete the strength of the uptrend, but then we recommended selling the Euro Dollar as its gains moved all technical indicators towards strong overbought levels.
According to the economic calendar, the European statistical office Eurostat said that the inflation rate in the Eurozone reached 2.2% on an annual basis, down from 2.6% previously, and the unemployment rate fell unexpectedly to 6.4% from 6.5%. The inflation figures represent a significant drop towards the ECB’s 2.0% target, but we believe investors were concerned that it could fall further after the negative surprises from Germany and Spain just 24 hours ago.
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1Overall, the inflation results from Germany and Spain have weakened the euro and put markets on alert for another potential negative surprise. The consensus reading appears to have sparked some buying interest, similar to the relief in the euro.
According to Forex trading platforms, EUR/USD currency pair was bid at 1.1060 on the release and rose to 1.1080 in the minutes that followed. EUR/GBP was higher. Financial markets are generally pricing in a September rate cut by the ECB as a certainty. However, the odds of an October rate cut have risen this week.
This is due to a range of near-term indicators pointing to slowing economic activity and fading confidence in the coming months, with concerns focused on Germany. This should keep the ECB on alert for downside risks and could prompt it to take more decisive action on interest rates. However, a rate cut in October is by no means guaranteed, given that core inflation in the Eurozone held steady at 2.8% in August, down from 2.9% in July. Services inflation rose again in August to 4.2%. In July, that figure was 4%. On a monthly basis, prices rose 0.4%. So if bets on an October rate cut fade in the coming days and weeks, the euro could find itself better supported than it is now.
The US dollar index (DXY) has had its worst performance this year. Recent inflation data has strengthened the case for the Federal Reserve to cut interest rates several times this year, with swap markets pricing in around 100 basis points of cuts by the end of the year, although the timing of the biggest cut remains uncertain. Core personal consumption expenditures (PCE) prices, excluding food and energy, rose 0.2% month-on-month in July, in line with market expectations.
Focus now turns to the upcoming US jobs report in August as the Fed shifts its attention from inflation to the labor market. Fed Chair Jerome Powell reiterated that the time is right to cut rates, boosting expectations of a rate cut starting in September while signaling caution against further labor market weakness.
EUR/USD Technical analysis and forecast:
We expect the EUR/USD to remain range bound until markets and investors react to the US jobs numbers, which will have a strong and direct impact on the future of the US interest rate decision this month. Keeping the interest rate high may bring more selling of the Euro Dollar and accordingly the most important support levels will be 1.0920 and 1.0800 respectively and then the hopes of the rise will be evaporated. Ultimately, we still prefer selling the Euro Dollar from every rising level
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