EUR/USD Weekly Forecast: Inflation, Services PMIs, and the US Jobs Report

Highlights

• The EUR/USD gained 0.21% in the week ending December 29, closing the week at $1.10375.
• Eurozone inflation and private sector PMIs could influence market bets on a Q1 2024 ECB rate cut.
• The Fed Minutes, ISM Non-Manufacturing PMI, and the US Jobs Report will influence expectations of a Q1 2024 Fed rate cut.

Weekly Overview of the EUR/USD in the Week Ending December 29, 2023

In the week ending on December 29, the EUR/USD gained 0.21%, closing the week at $1.10375. The EUR/USD fell to a Monday low of $1.10050 before striking a Thursday high of $1.11393.

EUR/USD Analysis: Inflation and Private Sector PMIs in Focus

On Tuesday, the manufacturing PMI numbers for Euro area member states and the Eurozone will hold significance for the EUR/USD pair. Any deterioration in manufacturing sector conditions could potentially raise concerns about a recession in the Euro area. Investors must look beyond the headline figures and consider sub-components such as prices, new orders, and employment.

A decline in manufacturing activity and falling prices may increase expectations of an ECB rate cut in Q1 2024.

Moving to Wednesday, German unemployment data needs consideration. A worsening labor market could impact consumer spending and could dampen demand-driven inflation. If inflationary pressures soften, this might initiate discussions within the ECB regarding possible rate cuts.

On Thursday, French and German inflation numbers and Euro area services PMIs will draw investor interest.

Finally, Eurozone inflation figures and German retail sales data will conclude a busy week for European markets.

If inflation numbers come in higher than expected and the service sector shows an upward trend, this would align with recent ECB statements. ECB Executive Board members have warned of a higher-for-longer interest rate environment. Investors must consider the sub-components of the services PMIs, including employment, prices, and new orders.

Beyond the numbers, investors must monitor ECB commentary. Reaction to the PMI and inflation reports will move the dial.

US Dollar Update: The Fed, ISM PMIs, and the Jobs Report

The US manufacturing sector will attract investor interest in the upcoming week. Key economic indicators to watch include the S&P Global US Manufacturing PMI (Tue) and the ISM Manufacturing PMI (Wed). If the manufacturing sector experiences a significant contraction, it could increase expectations of a Fed rate cut in the first quarter of 2024.

On Wednesday, two critical events demand investor attention: the US JOLTs Job Openings Report and the release of FOMC Meeting Minutes. An increase in job openings may influence expectations regarding a Fed rate cut. Meanwhile, the FOMC Meeting Minutes could provide insights into the Fed’s willingness to implement rate cuts in the first quarter.

Later in the week, the focus will shift to the services sector and the labor market. The ISM Non-Manufacturing PMI and the US Jobs Report on Friday will be pivotal reports. Weaker service sector activity and softer labor market conditions could reinforce expectations of a Q1 2024 Fed rate cut.

Softer labor market conditions would affect wage growth and consumer spending. Downward trends in consumer spending could dampen demand-driven inflationary pressures. A softer inflation outlook would support bets on a Q1 2024 Fed rate cut.

Weaker service sector activity could reinforce bets on a Fed rate cut in the first quarter. The US services sector contributes over 70% to the US economy and impacts inflation trends.

Short-Term Forecast:

The near-term trends for EUR/USD will depend on private sector PMIs, inflation, and labor market data. A pickup in euro area inflation and steady service sector activity could tilt monetary policy divergence toward the EUR. However, the US Jobs Report could materially impact bets on a Q1 2024 Fed rate cut.

EUR/USD Price Action

Daily Chart

The EUR/USD remained above the 50-day and 200-day EMAs, sending bullish price signals.

A EUR/USD break above the $1.10720 resistance level would support a move toward the $1.12 handle.

Private sector PMIs, inflation, the Fed minutes, and the US Jobs Report are focal points for the week ahead.

However, a fall below the $1.10 handle would give the bears a run at the $1.09294 support level and the 50-day EMA.

The 14-period Daily RSI at 60.10 suggests a EUR/USD move to the $1.11 handle before entering overbought territory.

4-Hour Chart

The EUR/USD sat above the 50-day and 200-day EMAs, confirming a bullish price trend.

A EUR/USD break above the $1.10720 resistance level would give the bulls a run at the $1.12 handle.

However, a drop below the 50-day EMA would support a fall to the $1.09294 support level and the 200-day EMA.

The 14-period 4-Hourly RSI at 46.99 suggests a EUR/USD fall through the $1.09294 support level before entering oversold territory.