EUR/USD Prices Forecast: ECB Forced to Balance Inflation Amid Business Contraction

Highlights

• Euro shows resilience despite economic headwinds.
• ECB rate hike prospects dim; 40% chance next month.
• Euro’s short-term outlook leans bearish amidst uncertainties.

Euro Holds Steady Amid Economic Uncertainty

The Euro is displaying resilience against the U.S. Dollar on Thursday, following a turbulent session influenced by mixed global economic indicators. Early losses on Wednesday were recouped as disappointing U.S. PMI data caused a dip in U.S. yields, which in turn pressured the dollar.

The EUR/USD was recorded at 1.0863 as of 08:29 GMT, showing no change from its previous value.

Mixed Economic Signals: Europe and U.S.

Overnight surveys reveal a concerning picture in Europe; both manufacturing and service sectors are shrinking. German business activity, a cornerstone of the European economy, contracted at its fastest pace in over three years this August. Across the Atlantic, U.S. business activity also waned, marking its weakest growth since February, which hints at a potential economic slowdown.

Rate Hike Prospects: Dimming Outlook

Expectations for a September interest rate hike by the European Central Bank (ECB) have been severely curtailed. Money market futures indicate just a 40% probability for a rate increase next month, plummeting from a 60% chance priced in before the release of disappointing business activity data. The Federal Reserve’s Jackson Hole symposium is also highly anticipated for its impact on U.S. rates.

ECB’s Tightrope Walk: Inflation vs. Growth

The European Central Bank finds itself in a precarious situation, caught between quelling high inflation and avoiding an economic recession. A majority of economists polled by Reuters expect the ECB to pause interest rate hikes this September. Nevertheless, the possibility of a year-end rate increase still looms, underscoring the ECB’s aggressive monetary stance.

Short-Term Forecast: Cautiously Bearish

With dwindling prospects for an immediate rate hike and ongoing contraction in business activity, the short-term outlook for the Euro appears bearishly skewed. A pause in ECB rate hikes this September seems more likely than not, although this should not be mistaken as a sign that inflation has reached desirable levels.

In sum, traders and policymakers alike find themselves navigating through uncertain economic waters, making the next moves of central banks critically important to watch.

Technical Analysis

The current EUR/USD price of 1.0859 shows a slight decrease from its previous 4-hour price of 1.0870. Analyzing the moving averages, it’s trading below both the 200-4H moving average of 1.1017 and the 50-4H moving average of 1.0886, suggesting a bearish trend. The 14-4H RSI at 46.54 is below the neutral 50, indicating weaker momentum.

The price is hovering just above the main support area (1.0834 to 1.0804), but is significantly below the main resistance area (1.1042 to 1.1065). Based on these technical indicators, the EUR/USD market sentiment appears to be bearish in the short term.