EUR/USD Forecast: Between German Economic Pulse and Powell’s Predictions

Highlights

• EUR/USD dips 0.48% to close at $1.08103; U.S. economic signals and Powell speech anticipation are factors.
• Christine Lagarde’s upcoming address might steer the market sentiment after disappointing Euro PMI figures.
• Powell’s upcoming discourse is poised to be a fulcrum; divergent monetary policies could favor the dollar.

Thursday Overview

The EUR/USD fell by 0.48% on Thursday to wrap up the day at $1.08103. A mixed start to the day saw the EUR/USD rise to an early high of $1.08573 before sliding to a low of $1.08049. US economic indicators and market angst ahead of the Fed Chair Powell speech weighed.

EUR/USD and Sub-$1.08 in the Hands of Fed Chair Powell

German GDP and Ifo Business Climate Index numbers will draw interest this morning. Following dire August private sector PMI numbers on Wednesday, investors will likely be ready for more gloomy reports.

Economists forecast the German economy to contract by 0.2% in the second quarter year-over-year and to stall in the quarter. A quarter-on-quarter contraction would weigh heavily. With the gloomy mood, a surprise to the upside would likely have more impact. Significantly, a quarter-on-quarter economic contraction would give the ECB more reason to hit the brakes.

Economists forecast the Ifo Business Climate Index to fall from 87.3 to 86.7. A more marked decline would add to the bearish mood. However, we expect the Ifo numbers to play second fiddle to the GDP data.

With the German economy in the spotlight, investors should monitor ECB chatter. ECB President Christine Lagarde is on the calendar to speak today. The disappointing PMI numbers from the euro area eased bets on a September ECB rate hike. Hawkish comments would drive buyer appetite.

Fed Chair Powell and the Jackson Hole Symposium in Focus

Finalized Michigan Consumer Sentiment figures will draw interest this afternoon. Despite impressive US retail sales figures, consumer sentiment waned in August, according to prelim figures. Upward revisions would support a more hawkish Fed monetary policy outlook.

An upward trend in consumer sentiment signals a pickup in consumption that would fuel demand-driven inflationary pressures. Further rate hikes would reduce disposable incomes, impact spending, and ease demand-driven consumer price inflation.

According to preliminary numbers, the Michigan Consumer Sentiment Index fell from 71.6 to 71.2 in August.

However, while the stats will draw interest, we expect Fed Chair Powell’s speech to be the key driver. After the consumer sentiment numbers, Powell could talk about higher-for-longer.

Higher-for-longer would shift monetary policy divergence more in favor of the dollar. Considering the latest labor market numbers and sticky inflation, dovish chatter would catch the markets by surprise.

EUR/USD Price Action

Daily Chart

The Daily Chart showed the EUR/USD below the 1.0850 – $1.0900 resistance band. After the Thursday loss, the EUR/USD sat below the 50-day and 200-day EMAs, sending bearish near and longer-term price signals.

Looking at the 14-Daily RSI, the 31.61 reading reflects a bearish sentiment. The RSI aligns with the EMAs, signaling a fall through the upper level of the $1.0750 – 1.0700 support band. However, a EUR/USD move through the 200-day EMA would bring the $1.0850 – $1.0900 resistance band into view.

4-Hourly Chart

Eying the 4-Hourly Chart, the EUR/USD sits below the $1.0850 – $1.0900 resistance band. The EUR/USD also sat below the 50-day and 200-day EMAs, sending bearish near and longer-term price signals.

The 14-4H RSI at 30.76 reflects a bearish sentiment, with selling pressure outweighing buying pressure. Significantly, the RSI signals a fall through the upper level of the $1.0750 – $1.0700 support band to bring sub-$1.07 into play. However, a move through the lower level of the $1.0850 – $1.0900 resistance band would give the bulls a run at the 50-day EMA.