EUR/USD Forecast: Dollar recovery looks overdone ahead of CPI and FOMC

The EUR/USD was testing the 1.160 support area at the time of writing and bouncing back from its earlier lows. The lack of follow-through on the dollar side is keeping the pair from breaking lower. With US CPI on tap on Friday and FOMC next week, all while the US government shutdown continues, you can understand why there is lack of appetite to sharply bid up the dollar despite the crude oil recovery and weaker inflation data from the UK. Markets remain cautious, though, as geopolitical headlines from Europe continue to send mixed signals. The Trump-Putin meeting in Budapest has been called off, while reports suggest European nations are working on a 12-point peace plan for Ukraine. Still, traders are treating these developments with scepticism. Meanwhile, policymakers at the ECB remain committed to their neutral stance on rates and inflation guidance, meaning the EUR/USD forecast leans slightly bullish.

 

Before discussing the macro factors further, let’s first turn our gaze to technicals and highlight some levels on the daily chart of the EUR/USD.

 

EUR/USD technical analysis and levels to watch

 

 

Looking at the chart of the EUR/USD and you can’t help but feel it is as neutral as it can be. The length side-ways action over the past several months has totally ended the prior bullish momentum, yet the lack of a more meaningful breakdown so far suggests it is not a sellers’ market either. This means trading the EUR/USD from one level to another is the way to go until a new trend established. On balance, though, the underlying long-term trend remains bullish, which is highlighted by the fact that the higher highs and higher lows have not been broken yet while price still holds above the 200-day moving average.  Key support is the green shaded region starting at just below the 1.16 handle and extending to just below 1.15. Short-term res comes in around 1.1650; break this and resistance trend of channel will be in focus next around 1.1700. Bullish above it.

 

Dollar momentum fades without fresh data

 

On the dollar side, sentiment appears to be cooling. The US government shutdown, now the second longest in history, has delayed key data releases, leaving markets flying somewhat blind. Without fresh labour market figures, investors find little reason to scale back expectations of two Fed rate cuts by year-end and possibly three by March.

 

In this environment, it’s difficult to be outright bullish on the dollar. Any escalation in US-China trade tensions could add further downside pressure. The longer this issue lingers, the greater the risk of a dollar pullback – which could help the EUR/USD recover modestly in the near term.

 

CPI and FOMC to set the tone for EUR/USD forecast

 

While the eurozone’s sluggish data continues to hold back the euro, the downside has been cushioned by a softer dollar tone. This puts Friday’s release of the Eurozone PMIs into sharp focus. The next major catalyst for EUR/USD forecast will likely come from the US side, however, with Friday’s delayed CPI print likely to inject some volatility.  Next week’s FOMC meeting will be the real test. If policymakers confirm another rate cut, it could signal that the Fed is leaning more dovish, further limiting the dollar’s upside. In that case, the 1.160 support on EUR/USD could hold firm, setting the stage for a possible rebound towards 1.180 in the short term.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R