EUR/USD Weekly Forecast: German Economy Dictates the Euro’s Pulse?

Highlights

• EUR/USD dipped by 0.14% to $1.06452 last week, extending the losing streak to ten weeks.
• Economists forecast German and Eurozone annual inflation rates to soften markedly in September.
• US economic indicators support another strong showing for the dollar.

Weekly Overview of Week Ending September 22, 2023

In the week ending September 22, the EUR/USD fell by 0.14% to end the week at $1.06452. It was a mixed week, with the EUR/USD rising to a Wednesday high of $1.07368 before falling to a Friday low of $1.06147. The EUR/USD extended its weekly losing streak to ten consecutive weeks.

The German Economy and Inflation Take Center Stage

German Ifo Business Climate numbers for September kickstart the week. The weaker macroeconomic environment suggests a decline in business sentiment. However, better-than-expected economic indicators from China and a recovery across the German services sector will likely deliver a pickup in the Ifo Expectations Index.

Economists forecast the headline Ifo Business Climate Index to fall from 85.7 to 85.0. The Current Assessment paints the gloomy macroeconomic environment. However, economists forecast an increase in the Business Expectations Index, which would cushion the impact of a weaker headline figure on the EUR/USD.

On Wednesday, German consumer sentiment figures will also draw investor interest. Economists predict the GfK Consumer Climate to rise from -25.5 to -24.8. Hopes of an end to the ECB monetary policy tightening cycle may support a pickup in consumer sentiment. However, uncertainty about the employment outlook and the economy gives reasons for consumers to cap spending.

The German economy remains in the spotlight on Thursday, with prelim inflation numbers for September due out. The markets are betting on the ECB hitting the brakes on raising rates further. However, sticky inflation would align with the higher-for-longer forward guidance.

Economists forecast the German annual inflation rate to soften from 6.1% to 4.5% in September.

On Friday, German retail sales and unemployment numbers also need consideration. However, unless the numbers are particularly weak, preliminary inflation figures for the Eurozone will likely have a more significant impact on buyer appetite for the EUR.

Economists forecast the Eurozone annual core inflation rate to soften from 5.3% to 4.9%. Softer-than-expected numbers could ease pressure on the ECB to keep interest rates higher for longer.

Economic Indicator Assessment

Weaker business and consumer confidence would send two key signals. First, a pullback in business investment that could lead to higher unemployment. An uncertain labor market outlook would force consumers to reduce spending on non-essential items.

Reduced consumption would ease demand-driven inflationary pressures and pressure on the ECB to maintain interest rates at a higher level to curb spending and inflation.

ECB Member Commentary and the Bulletin Focal Points

Beyond the numbers, investors must monitor ECB commentary throughout the week. ECB President Christine Lagarde (Mon/Fri), ECB Chief Economist Philip Lane (Tues), and Executive Board members Isabel Schnabel (Mon), Andrea Enria (Wed)/Thurs), and Elizabeth McCaul (Thurs) are on the calendar to speak.

Comments relating to the economic indicators and influence on the ECB outlook remain the focal points. The EUR/USD should be responsive to any deviation from the higher-for-longer script.

With market sensitivity to the ECB and euro area economic indicators elevated, the ECB Economic Bulletin (Wed) will also move the dial.

US Inflation, the Labor Market, and Consumption in Focus

Consumer confidence figures for September will draw investor interest on Tuesday. A pickup in consumer confidence would signal an upbeat consumption outlook. US private consumption accounts for 70% of GDP. Significantly, a positive consumption outlook would fuel demand-driven inflationary pressures, keeping pressure on the Fed to push rates higher.

On Thursday, initial jobless claims and finalized Q2 GDP numbers will influence Fed policy bets. Barring a marked revision to Q2 GDP numbers, the jobless claims will have more impact on the dollar. Tight labor market conditions fuel wage growth and consumer spending.

Core PCE Price Index and personal spending figures for August will close out another pivotal week for the US dollar. Sticky inflation and a further pick up in personal spending would support the hawkish Fed interest rate path.

Beyond the numbers, investors should monitor FOMC member speeches.

Short-Term Forecast:

The EUR/USD is on target to extend its losing streak to eleven consecutive weekly losses. Softer euro area inflation would ease pressure on the ECB to maintain rates higher for longer. In contrast, US forecasts point to sticky inflation, a pickup in consumption, and tight labor market conditions. Forecasts align with the hawkish Fed interest rate path.

EUR/USD Price Action

Daily Chart

The EUR/USD sat below the 50-day and 200-day EMAs, affirming bearish price signals. A return to $1.07 would support a EUR/USD move toward the $1.07635 resistance level. However, economic indicators from Germany and the US must be EUR/USD-friendly to signal a return to $1.07.

A break below the $1.06342 support level would give the bears a look at $1.0550. The Eurozone inflation figures must be softer than prelim to support a sharper EUR/USD pullback.

The 14-period Daily RSI at 37.69 supports a EUR/USD fall through the $1.06342 support level before entering oversold territory.

4-Hour Chart

The EUR/USD hovers below the 50-day and 200-day EMAs, reaffirming the bearish price signals. A EUR/USD break below the $1.06342 support level would bring $1.0550 into play.

However, a break above the 50-day EMA would signal a EUR/USD move toward the $1.07635 resistance level.

The 14-period 4-Hourly RSI at 43.09 supports a EUR/USD fall through the $1.06342 support level before entering oversold territory.