Euro to US dollar analysis: EUR/USD lifted by German ZEW ahead of US CPI

• Euro to US dollar analysis: Improvement in ZEW surveys boost for euro
• All eyes on US inflation – headline CPI seen falling to 3.3% from 3.7% previously
• EUR/USD technical analysis: Euro could climb to 200-day average ~ $1.08 next

The EUR/USD and all other major euro crosses rose this morning, finding support from slightly stronger Eurozone data and the overall positive risk tone across financial markets we have seen in recent days. The dollar index was a touch lower, weighed down further by a modest rise in GBP/USD thanks to stronger-than-expected UK wages data. Investors were reluctant to punish the dollar more forcefully, however, as they awaited the release of key US inflation data. Indeed, the greenback managed to come off its earlier lows by mid-morning European session.

Improvement in ZEW surveys boost for euro

There was some positive news from the Eurozone for a change. While investors’ assessment of the current situation remained at extremely poor levels, they have nevertheless turned optimistic about the outlook for the German economy. This is what the latest ZEW survey pointed out, which is based on about 300 German institution investors and analysts. They also grew more optimistic about the Eurozone’s outlook than the month before:

• German ZEW survey current conditions -79.8 vs -76.9 expected and -79.9 last
• German ZEW Economic Sentiment +9.8 vs +5.0 expected, rises from -1.1 last in its first positive reading since April.
• Eurozone ZEW Economic Sentiment 13.8 vs. 6.1 expected and 2.3 last.

Meanwhile, Eurozone GDP was left unrevised at -0.1% q/q as expected, but the flash employment change was slightly better at +0.3% q/q.

Euro to US dollar analysis: All eyes on US CPI next

Attention is turning to the release of US CPI inflation data, due at 13:30 GMT. US inflation has surprised to the upside in each of the past two months and the dollar bears would not want to see a hattrick of that trend. In September, annual CPI remained unchanged at 3.7%, defying market expectations of a slight decrease following an even larger surprise the month before. But if we see a larger-than-expected drop in CPI this time, then it will further boost the “peak interest rates” narrative and potentially hurt the dollar and underpin the EUR/USD. Economists expect annual CPI to have fallen to 3.3% from 3.7% previously, while the month-over-month rate is seen rising 0.1% following the above-forecast 0.4% increase the month before. Core CPI is expected to have risen by 0.3% m/m, keeping the annual rate unchanged at 4.1%.

Later this week, we have some more important US data to provide direction for the dollar. These include retail sales, PPI and Empire State Manufacturing Index all on Wednesday, and industrial production, jobless claims and Philly Fed Manufacturing Index on Thursday.

How will the dollar react to the CPI data?

A weaker print than expectations is what the dollar bears would be eyeing for. But it is not as simple as that. It also depends on which pair you are trading. For example, the USD/JPY is likely to react more meaningfully to upside surprises than downside given the big divergence in monetary policy between the US and Japan, compared to the EUR/USD because of its recent bullish trend and a still-hawkish ECB. Therefore, the EUR/USD is the one to watch for bullish momentum should CPI come in weaker than expected.

The CPI data could help shape expectations for the Fed’s policy next year. Currently, most analysts agree that a rate cut is not seen at least until the end of the second quarter. Morgan Stanley economists think the Fed will start cutting rates in June 2024, followed by another one September. For Goldman Sachs analysts, the first 25-basis-point reduction will come no earlier than in the fourth quarter of 2024. So, there is a lot of variability in the forecasts, which means incoming data releases will have a big role in the direction of the dollar moving forward.

EUR/USD technical analysis

Source: TradingView.com

As we had previously highlighted the possibility, the EUR/USD managed to defend key support around the shaded region on my chart in the 1.0635 to 1.0667 area, the base of the previous breakout. The short-term outlook remains bullish given the interim higher highs and higher lows we have seen of late. The fact that price is also holding above the 21-day exponential means the short-term trend is no longer bearish. If today’s US CPI data triggers a bearish reaction in the dollar, this could lead to an accelerated move towards the 200-day average around 1.08 area next. On the way to that level, it is also worth keeping an eye on the 38.2% Fibonacci retracement level at 1.0765. I will maintain a bullish short-term view on this pair for as long as it holds above that key 1.0635-1.0667 support area.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R