EUR/USD, Oil: Two Trades to Watch

EUR/USD looks to eurozone & US inflation

• Eurozone inflation is expected to cool to 5.1% YoY
• US core PCE is expected to tick higher to 4.2%
• EUR/USD tests 100 sma resistance

EUR/USD is holding above 1.09 after reaching a two-week high in the previous session. Today, the pair is edging lower after weaker-than-expected German retail sales and ahead of inflation data from both the US and the eurozone.

German retail sales unexpectedly fell -0.8% MoM in July after falling -0.8% in June. However, this was below the 0.3% rise forecast in a sign that households remain squeezed amid high inflation (6.1%) and rising interest rates.

Attention is now turning to eurozone inflation data, which could provide further clues over whether the ECB will pause its rate hiking cycle in September. ECB President Christine Lagarde said at Jackson Hole that a pause could be appropriate at the next meeting.

Recent data, such as August PMI figures and GDP for the region, has pointed to a slowing economy, which takes the pressure off the ECB to hike aggressively.

Headline inflation is expected to cool to 5.1% YoY from 5.3%, and core inflation is expected to cool to 5.3% YoY from 5.5%.

The data comes after German inflation ticked lower and Spanish inflation ticked higher, highlighting the problem that the ECB has.

In addition to Eurozone inflation, ECB minutes to the July meeting will be released and could shed some light on the level at which policymakers see peak rates.

The USD will also be looking towards inflation data for clues over the Fed’s next steps. US core PCE, the Fed’s preferred measure for inflation, is expected to tick higher to 4.2% after steadily falling since February.

Hotter than expected core PCE would support the view that the Fed could raise interest rates further. According to the CME FedWatch tool, the market is pricing in just a 19% probability of a rate hike in September and a 43% probability that rates will be higher by November.

EUR/USD forecast – technical analysis

EUR/USD extended its recovery from 1.07660, rising back above the 200 sma, the falling trendline support and is testing the 100 sma resistance at 1.0920. The RSI is neutral, giving away few clues.

A rise above the 100 sma is needed to extend the recovery towards 1.10 round number and 1.1060 the August 10 high.

Should sellers successfully defend the 100 sma, bears could test the falling trendline support at 1.0850, ahead of 1.0760 the August low.

Oil flat after Chinese PMI data & ahead of US inflation figures

• Chinese official manufacturing PMI 49.7 in August
• US core PCE could drive Fed hike bets
• Oil tests resistance at 81.50

Oil is holding steady in cautious trade after 5 straight days of gains. Today, the upside is limited after Chinese manufacturing PMI remained below 50 for a fifth straight month and as investors look cautiously ahead to US core PCE data.

The China manufacturing PMI was 49.7 in August, up from 49.3 in July, still in contraction territory, raising concerns over the health of China’s economy as growth falters. While Beijing has announced some supportive measures, which could have helped manufacturing activity climb, the government has resisted mounting calls for more targeted, aggressive support measures.

Attention now turns to US inflation figures which could provide further clues over whether the Fed is likely to raise interest further. Hot inflation could point to further rate hikes, which would be considered bad news for oil demand.

US data yesterday showed that US Q2 GDP was downwardly revised to 2.1%, but oil prices rose in a case of bad news is good news for the oil market as it means more rate hikes are less likely.

On the supply side, Saudi Arabia is expected to continue its 1 million barrel-a-day voluntary oil output cut for a third consecutive month, adding to the existing OPEC  cuts and keeping supply tight.

Oil forecast – technical analysis

Oil has extended its rebound from 77.50 earlier in the month, running into resistance at 81.50. The RSI points to further gains while it remains out of overbought territory and the 50 sma crossing above the 200 sma in a golden cross formation keeps buyers hopeful of further gains.

A rise above 81.50 could see the price head towards 83.50 the April high ahead of 84.60 the August high..

Sellers could look for a break below 79.30, the weekly low to extend the selloff towards 77.50.