EUR/USD: Flat Trade as Investors Await Next Week’s US Inflation, Fed Rate Decision

Highlights

• Euro remains steady against the US Dollar, awaiting US consumer price inflation report and Fed decision.
• EUR/USD trading within a narrow range, uncertain about the Fed’s rate-hike campaign.
• Germany’s industrial output disappoints, raising concerns about the country’s economic prospects.

Overview

The Euro maintained a steady position against the US Dollar for a third consecutive session on Wednesday. Market participants opted to remain on the sidelines, eagerly awaiting next week’s release of the US consumer price inflation report and the Federal Reserve’s interest rate decision. Investors across the globe have been closely monitoring US rates, as recent data and statements from the Fed have induced volatility in the American currency.

The EUR/USD has been trading within a narrow range this week, primarily driven by concerns regarding the upcoming interest rate decision by the US Federal Reserve. Moreover, the prevailing downtrend in EUR/USD continues, leaving traders uncertain about the timing of the Fed’s rate-hike campaign conclusion. However, once there is greater clarity on this matter, the Euro may potentially witness upward movement.

Significant Risk to Euro if Fed is Hawkish

The Euro is exposed to substantial risk if the Fed leans towards a more hawkish stance, given the ongoing inflationary pressures and the resolution of obstacles like the debt ceiling. Notably, a report from the New York Fed on Tuesday highlighted the easing of supply-related pressures in May. As a result, this reduction in inflationary forces has significantly influenced global markets.

Looking ahead to the Federal Reserve meeting next week, the US consumer price report for May, scheduled for release on June 13, will provide investors with more insight into the state of the world’s largest economy. This report assumes greater importance following recent mixed economic data and dovish comments from Fed officials. According to CME Group’s FedWatch tool, Fed fund futures indicate a 73% probability of the Fed maintaining interest rates in the 5%-5.25% range.

German Industrial Output Disappoints

In the Eurozone, Germany’s industrial output in April fell below expectations, raising concerns about the region’s largest economy. Additionally, the federal statistical office reported a 0.3% growth in production compared to the previous month, which was lower than the anticipated 0.6% increase predicted by analysts.

While construction activity and pharmaceutical manufacturing witnessed growth, automotive production experienced a decline of 0.8%. The figures for March were revised to a 2.1% decrease in industrial production, emphasizing the ongoing challenges faced by German industries.

Concerns Rise for German Economy

Andrew Kenningham, chief Europe economist, voiced concerns about the future outlook, citing a bleak prospect for the rest of the year. The initial benefits enjoyed by German industry from global supply enhancements and lower gas prices have diminished. Declining new orders, weakened demand, and decreasing backlogs are projected to hinder output. In April, industrial orders dropped by 0.4%, further raising doubts about the strength of the German economy.

German Manufacturing Slumps

In May, the HCOB final PMI for manufacturing showed a significant decline in new orders. This points to a decrease in demand, especially in exports to China, Europe, and the United States. Carsten Brzeski, ING’s global head of macro, warned that if there is no notable increase in activity, the German economy’s recession might continue into the second quarter.

Short-Term Outlook:  Flat Ahead of US CPI Data, Fed Rate Decision

With the US CPI report and Fed rate decision approaching, we expect cautious behavior from key participants. They are likely to avoid taking large positions due to the high uncertainty surrounding these events. It is wise to stay on the sidelines and avoid significant positions before gaining more clarity.

Technical Analysis

The EUR/USD is trading lower on Wednesday, but on the bearish side of 1.0807 (PIVOT). Prices have been trading flat all week with traders showing respect for the pivot.

The inability to overcome 1.0807 (PIVOT) will signal the presence of strong sellers. This could trigger a resumption of the downmove with 1.0522 (S1) the next support target.

With the  trend down, sellers are likely to come in on the first test of 1.0807 (PIVOT). However, overtaking it will indicate strong counter-trend buying with 1.0979 (R1) the next target.

For a look at all of today’s economic events, check out our economic calendar.