EUR/USD Forecast: Uncertainty Clouds the Horizon, Awaiting Key Eurozone and US Data

Highlights

• EUR/USD’s tumble by 0.67% on Tuesday counters the previous day’s minor gains, closing at $1.07220.
• German factory orders face scrutiny with a predicted 4% drop in July, signaling recession fears.
• A potential slip in the US ISM Non-Manufacturing PMI could dampen hopes for a concluding Fed rate hike.

Tuesday Overview

The EUR/USD fell by 0.67% on Tuesday. Reversing a 0.19% gain from Monday, the EUR/USD ended the day at $1.07220. The EUR/USD rose to a high of $1.07983 before falling to a low of $1.07059.

German Factory Orders and Eurozone Retail Sales Need to Change the Narrative

German factory orders are in focus today. Economists forecast a 4% fall in July. A sharp fall would hint at a possible recession. However, the manufacturing sector accounts for less than 20% of the German economy. Weak orders may not sway the ECB from the September plans.

However, the focus will later turn to Eurozone retail sales. An increase in retail sales could indicate more ECB policy tightening. Higher rates can curb spending and ease demand-driven inflation.

With Eurozone recession concerns on the rise, ECB commentary is crucial. Board Member Elizabeth McCaul speaks today. Dovish comments would contrast with a more hawkish President Lagarde.

US ISM Non-Manufacturing PMI Survey in Focus

The ISM Non-Manufacturing PMI will be in focus this afternoon. With the markets betting on a higher for longer Fed interest rate path, the ISM PMI numbers need to align with market expectations.

Following the unexpected contraction across the euro area services sector, market jitters will likely test current levels before the numbers. Investors would consider a marked fall in the US ISM Non-Manufacturing PMI a prelude to a US economic recession.

Economists forecast the Non-Manufacturing PMI to slip from 52.7 to 52.5 in August.

Other stats include finalized S&P Global service and composite PMIs and trade data. However, we expect these to play second fiddle to the ISM Non-Manufacturing PMI numbers.

Immediate Forecast: Economic Divergence Hinged on US ISM PMI Survey

A weaker US ISM Non-Manufacturing PMI might reduce expectations for a final Fed rate hike. But with Germany potentially pulling the Eurozone into a recession, the dollar remains in the driving seat due to economic and policy divergences.

EUR/USD Price Action

Daily Chart

The EUR/USD sat below the trend line and the $1.07635 resistance level. Significantly, the EUR/USD fell back from the 50-day and 200-day EMAs, sending bearish price signals.

Risk-off sentiment and steady US ISM Non-Manufacturing PMI numbers would bring sub-$1.07 and the $1.06342 support level into play. The EUR/USD would need an unexpected jump in German factory orders and Eurozone retail sales to target the $1.07635 resistance level. A return to $1.0750 would give support a run at the trend line.

Considering the 14-Daily RSI at 35.90 and the EMA signals, the EUR/USD could target $1.07 before entering oversold territory.

4-Hourly Chart

The 4-Hourly Chart continues to reaffirm the near-term bearish trend. The EUR/USD sits below the 200-day and 50-day EMAs. After the Tuesday sell-off, the EUR/USD remains below the trend line and $1.07635 resistance level.

Better-than-expected euro area economic indicators would bring the $1.07635 resistance level and trend line into play. However, price action will hinge on the US ISM Non-Manufacturing PMI.

Better-than-expected US ISM PMI numbers would bring sub-$1.07 and the $1.06342 support level into play.

With the downward bias intact, the 14-4H RSI at 32.21 suggests the EUR/USD more room to fall before entering oversold territory.