EUR/USD Forecast: German Recession Fears and ECB Talk Set the Stage

Highlights:

• EUR/USD extended its losing streak to seven weeks, closing at $1.07731.
• Scheduled ECB member speeches will be critical for market sentiment.
• Higher probability of the Fed ending its monetary policy tightening cycle, according to CME WatchTool.

Overview

The EUR/USD extended the losing streak to seven weeks. In the week ending September 1, the EUR/USD slipped by 0.20%. Following a 0.68% loss from the previous week, the EUR/USD closed at $1.07731.

Significantly, the EUR/USD hit a Wednesday high of $1.09454 before tumbling to a Friday low of $1.07720.

The German Economy Remains in the Spotlight on Looming Recession

After another set of gloomy economic indicators, the German economy remains in the spotlight.

On Monday, trade data for July will kickstart the week. A pickup in imports and exports would ease market fears of a prolonged German recession.

However, German factory orders and industrial production numbers will likely have more impact. Factory orders are out on Wednesday, with production figures out on Thursday.

On Friday, finalized German inflation figures will wrap up another testy week on the European economic calendar. Downward revisions to prelim inflation figures would weigh on the EUR/USD.

Other stats include service sector PMIs (Tues) and Eurozone GDP (Thurs) numbers. Downward revisions to prelim numbers for France, Germany, and the Eurozone will test buyer appetite. However, GDP numbers for the Eurozone will likely have more influence on investor sentiment.

ECB Commentary to Influence Hawkish ECB Rate Hike Bets

Beyond the numbers, investors should monitor scheduled and unscheduled ECB member speeches throughout the week.

ECB Executive Board members Edouard Fernandez-Bollo (Tues), Elizabeth McCaul (Wed), Fabio Panetta (Mon), Frank Elderson (Mon/Thurs), Isabel Schnabel (Tues), and Luis de Guindos (Tues) are on the calendar to speak this week. However, ECB President Christine Lagarde (Mon/Tues) and ECB Chief Economist Philip Lane (Mon) will have more influence.

FOMC Member Commentary and the Services Sector in Focus

Last week, the JOLTs Job Openings, ADP Nonfarm Employment Change, US Personal Income and Outlays Report, and Jobs Report fueled bets on a Fed pause in September.

The probability of a Fed rate hike pause in September stood at 94.0% on Friday, up from 80% on August 25, according to the CME WatchTool. While the market bets on one further rate hike in November eased, the chances of a December rate hike fell markedly. On Friday, the probability of a 25-basis point Fed rate hike stood at 30.8% versus 45.2% on August 25.

Economic indicators from the US need to be bullish to shift sentiment toward the Fed interest rate trajectory.

On Wednesday, the ISM Non-Manufacturing PMI will move the dial. Economists forecast the PMI to slip from 52.7 to 52.5. While the headline figure will draw interest, investors should consider the subcomponents, including employment and inflation.

US jobless claims also need consideration on Thursday. The US Jobs Report and JOLTs Job Openings revealed cracks in the US labor market. Another fall in initial jobless claims would test the theory of weaker labor market conditions.

Beyond the two key reports, investors should monitor Fed chatter throughout the week. FOMC members Lorie Logan, Michelle Bowman, Michael Barr, and Fed Vice-Chair John Williams are on the calendar to speak. While all are voting members, Williams will likely have more influence.

Hawkish Fed chatter and hotter-than-expected ISM PMI numbers could shift bets on the Fed interest rate trajectory.

EUR/USD Technical Indicators

Daily Chart

The EUR/USD held above the trend line despite the Friday pullback. Support at the trend line will be pivotal on Monday, with German trade data in focus. Weak numbers would see the EUR/USD break below the trend line and the $1.07635 to bring sub-$1.07 into view.

However, German factory orders and industrial production numbers must disappoint to send the EUR/USD to sub-$1.07.

Service sector PMI numbers will also influence ECB policy expectations. However, ECB member commentary will be more influential. Hawkish comments from ECB President Christine Lagarde and Chief Economist Philip Lane would deliver EUR/USD price support.

A EUR/USD move through the 200-day EMA would support a breakout from the $1.08322 resistance band to target $1.09. However, Fed chatter and US economic indicators must be EUR/USD-friendly to signal a breakout.

Considering the 14-Daily RSI at 37.09, the EUR/USD has room to fall and target sub-$1.07 before entering oversold territory. A break under the trend line would bring sub-$1.07 into play.

4-Hourly Chart

The EUR/USD holds above the trend line and $1.07635 support band while sitting below the 200-day EMA. Hawkish ECB comments and better-than-expected German stats would support a bullish week. A EUR/USD move through the 200-day EMA would signal a breakout from $1.08322 to target $1.09.

However, weaker-than-expected German economic indicators would see the EUR/USD fall below the trend line. A fall through the $1.07635 support band would give the bears a run at $1.07. Better-than-expected US ISM PMI numbers and hawkish Fed comments would bring the $1.06342 support band into view.

The 14-4H RSI at 37.09 gives the EUR/USD further room to fall before entering oversold territory.