EUR/USD Forecast: Inflation Focus Leads to Sub-$1.04 Predictions

Highlights

• EUR/USD saw a 0.66% decline on Wednesday, ending the session at $1.05022.
• German inflation is predicted to drop from 6.1% to 4.6%, likely impacting EUR/USD.
• The hawkish Fed may support a fall in EUR/USD to parity if the US economy stays resilient.

Wednesday Overview

On Wednesday, the EUR/USD declined by 0.66%. Following a 0.20% fall on Tuesday, the EUR/USD ended the session at $1.05022. The EUR/USD rose to a high of $1.05743 before sliding to a low of $1.04881.

The ECB and German Inflation in the Spotlight

Inflation will be the talking point today. Prelim September inflation figures for Spain and Germany will be in focus today. Barring a higher-than-expected Spanish inflation figure, the inflation numbers from Germany will likely impact the EUR/USD more.

Economists predict a decrease in German annual inflation from 6.1% to 4.6%. Although inflation will likely stay elevated, a significant softening would reduce the need for the ECB to keep interest rates higher for longer. A potentially less hawkish policy outlook may put additional pressure on the EUR/USD.

Beyond the numbers, the ECB Economic Bulletin and ECB Executive Board member speeches also need consideration. ECB Executive Board members Andrea Enria and Elizabeth McCaul are on the calendar to speak today.

US Jobless Claims to Deliver Pre-US Jobs Report Labor Market Signals

Later today, US jobless claims will be the focal point. Investors are eying reasons for the Fed to deviate from its hawkish interest rate path. However, tight labor market conditions will likely leave the Fed on an aggressive interest rate trajectory.

Economists forecast initial jobless claims to increase from 201k to 217k. However, the markets may accept sub-220k. Lower-than-expected jobless claims would fuel hawkish Fed bets. Rate hikes weaken labor market conditions and soften wage growth. A deteriorating labor market environment would force consumers to curb spending, easing demand-driven inflationary pressures.

Q2 GDP numbers for the US are also due out. Barring a marked revision to the prelim US GDP, the finalized figure should have a limited impact on the US dollar.

Short-Term Forecast:

The talk of parity has resurfaced. Armed with a resilient US economy, a hawkish Fed may support a EUR/USD fall to sub-$1.04. However, a spike in US jobless claims may surprise investors and dampen the demand for the US dollar.

EUR/USD Price Action

Daily Chart

The EUR/USD remained below the 50-day and 200-day EMAs, sending bearish price signals. Significantly, the 50-day EMA crossed through the 200-day EMA signaling further price weakness. Negative sentiment toward the Euro area economy continues to pressure the EUR/USD.

Steady US labor market numbers and softer German inflation figures would support a EUR/USD return to $1.0450. A fall to sub-$1.0450 would support a move to the $1.03922 support level.

However, a break above the $1.05230 resistance level would give the bulls a run at $1.06.

The 14-period Daily RSI at 24.36 indicates the EUR/USD in the oversold territory. Oversold territory suggests the EUR/USD may see a price recovery in the short term.

4-Hour Chart

The EUR/USD sits below the 50-day and 200-day EMAs, reaffirming the bearish price signals. A break below the $1.05230 support level would give the bears a run at sub-$1.05.

However, a EUR/USD fall to sub-$1.0450 would bring the $1.03922 support level into play.

A EUR/USD break above the $1.05230 resistance level would support a move toward the 50-day EMA.

The 14-period 4-Hourly RSI at 24.92 indicates a EUR/USD in oversold territory.