EUR/USD weekly outlook: Oil, inflation and NFP in focus

After coming under significant pressure in recent weeks, the EUR/USD came off its lows to finish the week on a positive note on Friday, albeit with only a mild rebound. That was not enough to prevent the exchange rate falling for the third consecutive week, as the US dollar and bond yields rallied across the board. The mild recovery on Friday came as oil fell on some positive but unconfirmed US-Iran reports, ahead of a busy week for macroeconomic data, which could shape the near term EUR/USD outlook.

 

EUR/USD staged a mild bounce as oil fell

 

Sentiment got a lift on Friday as reports emerged that the US and Iran were potentially resuming talks, which caused oil prices to fall back, with Brent crude moving below $100 per barrel.

 

With oil heading lower, this relieved some pressure on the currencies of economies that rely heavily on oil imports, including the Japanese yen, the euro and the British pound.

 

Meanwhile, investors were happy to book profits on their short EUR/USD positions ahead of the weekend, which also contributed to the small rebound we saw on Friday.

 

Looking ahead: Oil prices, inflation and employment data

 

Looking ahead to the new week, investors will be keeping a very close eye on oil prices to see whether there is a possible resumption of US-Iran talks, which could eventually lead to the reopening of the Strait of Hormuz.

 

From a macro point of view, there are a couple of important economic indicators to look forward to next week as well. We have a few employment indicators from the US, while in the Eurozone, we have German CPI on Wednesday, which is likely to be the most important data release for the single currency.

 

But for the dollar and wider financial markets, the key releases will be the US core PCE price index on Wednesday and then the non-farm payrolls report on Friday, which could have a significant impact on the direction of the dollar and also the near term EUR/USD outlook.

 

US Core PCE Price Index will be released on Wednesday, September 30. The recent dollar upsurge has been supported by the Fed's hawkish remarks, allowing markets to price in more tightening, with two hikes fully priced in by January. Any surprise showing in the Fed’s favourite inflation measure could trigger a sharp repricing of rate expectations.

 

US non-farm payrolls report is due on Friday, October 2. Apart from inflation and oil prices, one of the other reasons why the Fed has become hawkish is to do with economic data. Last month’s employment data was much stronger than expected. Another strong showing could see the Fed go ahead with another hike at its October meeting.

 

Technical EUR/USD outlook and levels to watch

 

From a technical analysis point of view, the EUR/USD has now reached some important support areas that had been tested on a few occasions during the summer and held.

 

 

In particular, it is the area around 1.1350 to 1.1400 has been quite significant in recent months, and so far, EUR/USD is holding above that zone. This keeps alive the possibility that we could see some sort of rebound in the week ahead.

 

A lot will obviously depend on the direction of oil prices, as well as the situation in the bond market.

 

If bond yields were to ease back, that should help boost the appeal of the euro and some of the lower-yielding currencies, following what has been relatively strong selling pressure on these currencies as US bond yields broke higher, with the 10-year Treasury yield moving above the 5% level.

 

So, the key levels to watch are 1.1350 to 1.1400, which is an important support area for EUR/USD.

 

If that area gives way, we could potentially see EUR/USD fall towards 1.1300 and possibly head down to 1.1200 thereafter.

 

On the upside, a break above 1.1400 could target 1.1450 initially, ahead of the 1.1500 area.

 

There is some resistance around that zone, which could hold prices back.

 

But ultimately, if a break above 1.1500 is confirmed, that could potentially trigger a sharp short-squeeze rally.