EUR/USD forecast: Oil, US inflation data and ECB all in focus

Risk appetite remained subdued on Wednesday, with equities and bonds under pressure as another leg higher in oil prices added to concerns over the deteriorating situation in the Middle East. In foreign exchange markets, the dollar was modestly firmer after initially weakening against most major currencies. The EUR/USD in particular will be an interesting pair to watch as we head into the second half of the week. Not only is the single currency particularly exposed to a renewed rise in energy prices given the eurozone’s reliance on imported energy. A sustained move in Brent above $100 a barrel would therefore risk becoming an increasingly important driver of the currency, particularly if higher oil prices begin to feed more clearly into the inflation outlook. Some of the focus is also on monetary policy. The ECB’s decision on Thursday comes between two important US inflation releases, leaving EUR/USD forecast exposed to developments on both sides of the Atlantic, as well as the situation in the Strait of Hormuz.

 

Oil prices are continuing to apply pressure

 

Economic data has been a more important source of FX volatility in recent months than energy prices. One reason is that the latest rise in oil prices has taken place from a much higher starting point than at the beginning of the year.

 

The initial surge in crude prices was particularly significant in both nominal and percentage terms, given the low base from which prices were rising. More recent gains have been less dramatic in percentage terms and, by extension, have represented a smaller incremental inflationary impulse.

 

That distinction may now be becoming less relevant.

 

A further sustained rise in crude would increase the pressure on the euro and could shift the market’s attention back towards energy prices and their implications for inflation. Brent was approaching the psychologically important $100 level at the time of writing, with momentum still pointing higher.

 

 

For the EUR/USD forecast, that leaves the oil market as an increasingly important counterweight to the relative resilience of the eurozone economy.

 

ECB decision comes amid renewed inflation uncertainty

 

The economic calendar becomes more consequential as the week progresses, with the ECB’s rate decision due on Thursday, September 10. The eurozone economy has so far proved more resilient than might have been expected given the Middle East conflict, while headline inflation has risen alongside energy prices.

 

Eurozone GDP was revised to 0.6% in the first quarter, from 0.4% previously estimated, while Sentix Investor Confidence improved to 5.1 earlier this week. The picture is not uniformly positive, however. Industrial production fell unexpectedly in both Germany and France, declining 1.1% and 0.4%, respectively.

 

Nevertheless, the broader resilience of the eurozone economy, combined with higher energy prices, has encouraged markets to price a more hawkish ECB. The immediate question is whether policymakers will endorse those expectations or push back against them.

 

A decision and communication that validate the current pricing could offer further support to the euro. Conversely, if Lagarde signals that the ECB is prepared to look through the latest oil-price shock and is reluctant to tighten policy further, the single currency could come under renewed pressure.

 

The more difficult scenario for the euro would be one in which higher energy prices materially weaken growth while simultaneously keeping inflation elevated — a combination that would raise the prospect of stagflation.

 

US inflation also in focus this week

 

Stateside, we have key inflation data to look forward to this week, providing additional direction for the EUR/USD forecast. Producer prices will be released between the ECB’s decision and President Christine Lagarde’s press conference, potentially adding another source of volatility for EUR/USD around 13:00–14:00 BST.

 

The more important US release, however, comes on Friday with the consumer price index. With relatively little major US data due before the Federal Reserve’s next meeting, the inflation figures will provide an important test of the market’s expectations for US monetary policy.

 

There is also a degree of divergence within the Fed. Chair Kevin Warsh has adopted a hawkish stance, while Governor Christopher Waller has taken a more cautious approach, arguing that the incoming inflation data should help determine the path for rates.

 

That makes the CPI report particularly significant as the final major inflation update before the Fed’s next meeting.

 

Technical EUR/USD forecast and levels to watch

 

The EUR/USD remains in consolidation, but the balance of risks is becoming more finely poised as the pair tests the 1.1635–1.1650 area.

 

 

This zone is significant because it marked the last support before the breakdown on Friday, August 28, while the 200-day moving average is also converging nearby. A failure to reclaim the area would leave the downside exposed on the EUR/USD chart.

 

Initial support is located around 1.1565–1.1575, followed by 1.1500 and then 1.1405.

 

A sustained break above 1.1635–1.1650, by contrast, would improve the near-term technical picture and put 1.1700 back into focus. A move through that level would expose 1.1800.

 

The fundamental backdrop would need to become more supportive for the latter scenario to develop. In particular, a moderation in oil prices would ease one of the more immediate headwinds facing the euro.