EUR/USD Weekly Forecast – The Fed v ECB and $1.06 in View

It’s a busy week for the EUR. Finalized euro area inflation figures will draw interest throughout the week. We expect the German (Tues), French CPI (Thurs), and the Eurozone (Fri) numbers to garner the most interest.

However, ZEW Economic Sentiment (Tues), Eurozone industrial production (Wed), and Eurozone trade data (Thurs) will also move the dial ahead of wage growth figures (Fri).

While the numbers will provide direction, the ECB monetary policy decision and ECB Press Conference will be the focal point. Economists forecast a 25-basis point interest rate hike. A 25-basis point interest rate hike would shift the focus to ECB President Christine Lagarde and the ECB press conference. The economic and inflation outlooks and any forward guidance will move the dial.

With the ECB policy decision and forward guidance proceeding from the Fed, the week could deliver a material shift in monetary policy divergence.

Beyond the numbers, investors should also consider ECB commentary. Executive Board members Luis de Guindos (Fri), Fabio Panetta (Thurs), Andrea Enria (Tues), and ECB President Christine Lagarde (Thurs) are on the calendar to speak.

With recessionary jitters resurfacing, investors should also monitor economic indicators from China.

Fixed asset investment, industrial production, retail sales, and unemployment figures will influence the Thursday session. We expect the industrial production and retail sales numbers to have more impact on market risk sentiment. However, stimulus chatter would be a boon for riskier assets.

EUR/USD Technical Indicators

The EUR/USD needs to avoid the $1.0734 pivot to target the First Major Resistance Level (R1) at $1.0801. A move through the $1.0775 would signal a bullish week. However, the economic indicators and central bank commentary need to deliver EUR support to give the bulls a run at $1.0850.

In the case of a breakout week, the EUR would likely test resistance at the Second Major Resistance Level (R2) at $1.0854 to bring $1.09 into view. The Third Major Resistance Level (R3) sits at $1.0975.

A fall through the pivot would bring the First Major Support Level (S1) at $1.0681 into play. In case of a data and central bank-fueled sell-off, the EUR/USD would likely test the Second Major Support Level (S2) at $1.0614 and support at $1.06.

The Third Major Support Level (S3) sits at $1.0493.

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The EUR/USD sat above the 50-day EMA, currently at $1.07325. The 50-day EMA closed in on the 100-day EMA, with the 100-day EMA narrowing to the 200-day EMA, delivering bullish signals.

A move through the 100-day EMA ($1.07583) would support a breakout from R1 ($1.0801) and the 200-day EMA ($1.08040) to give the bulls a run at R2 ($1.0854).

However, a fall through the 50-day EMA ($1.07325) would bring S1 ($1.0681) and sub-$1.0650 Major Support Levels into play. A fall through the 50-day EMA would send a bearish signal.

The US Week Ahead

It is a busy week ahead for the Greenback. The US CPI Report gets the week underway. Sticky inflation could refuel bets on a Wednesday Fed interest rate hike.

On Wednesday, we also expect market sensitivity to wholesale inflation numbers due ahead of the Fed interest rate decision. The markets are expecting the Fed to stand pat on monetary policy. However, the CPI Report and wholesale inflation numbers could change the narrative.

A hold on interest rates would turn the focus to the FOMC Rate Statement, Economic Projections, and Interest Rate Projections.

In the second half of the week, initial jobless claims, retail sales, and Philly Fed Manufacturing Index numbers will move the dial ahead of consumer sentiment figures on Friday.