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Highlights
- Friday saw the EUR/USD rise by 0.02%, capping off a turbulent week with a net decrease of 0.70%.
- German industrial numbers set a grim tone, casting doubt on Italy’s upcoming production figures.
- Amid a volatile economic backdrop, the EUR/USD’s position seems precarious; key reports loom ahead.
Friday Overview
On Friday, the EUR/USD gained 0.02%. After a 0.29% loss on Thursday, the EUR/USD ended the week down 0.70% to $1.06982. The EUR/USD fell to a low of $1.06940 before rising to a high of $1.07438.
Italian Industrial Production Numbers to Test Optimism
Italian industrial production figures for August will draw interest this morning. After grim numbers from Germany, investors will likely accept weak numbers. The Italian Manufacturing PMI for August stood at 45.4, up from 44.5 in July, signaling a further fall in production.
Economists forecast industrial production to decline by 0.3% in July and 1.7% year-over-year. While the Italian manufacturing sector contributes less than 15% to the Italian economy, we expect EUR/USD sensitivity to the figures. With service sector activity waning, a further deterioration in manufacturing sector activity would amplify economic woes across the euro area.
A deteriorating macroeconomic environment eases pressure on the ECB to hike rates. An uptrend in unemployment would impact disposable incomes, easing consumer spending and demand-driven inflation.
US Consumer Inflation Expectations A Prelude to the US CPI Report
This afternoon, investors need to consider the US Consumer Inflation Expectation figures. Economists forecast Consumer Inflation Expectations to soften from 3.5% to 3.4%. While softer inflation numbers would ease bets on more Fed rate hikes, the US CPI Report will be the focal point for the Fed on Wednesday.
In contrast to consumer expectations, economists forecast the US annual inflation rate to accelerate from 3.2% to 3.6% in August. With the FOMC in the blackout period, no FOMC members are on the calendar to offer forward guidance on monetary policy. Investors will likely re-evaluate the influence of these numbers on the Fed’s policy intentions.
A spike in inflation would raise the bets on further Fed rate hikes. Higher interest rates would impact the labor market and wage growth. Weaker labor market conditions and softer wage growth would curb spending and ease demand-driven inflationary pressures.
Short-Term Forecast:
Despite the modest gain this morning, the EUR/USD remains at risk of another retreat. Macroeconomic indicators and central bank policy bets leave the dollar in the driving seat. However, sentiment could shift on Wednesday and Thursday. The US CPI Report and US Retail Sales could paint a more dovish picture.
EUR/USD Price Action
Daily Chart
The EUR/USD stood below the 50-day and 200-day EMAs, sending bearish price signals. US inflation figures must come in softer-than-expected to support a run at the $1.07635 resistance level. However, industrial production numbers could spook investors and bring sub-$1.07 and the $1.06342 support level into view.
The 14-Day RSI at 37.67 signals a EUR/USD return to sub-$1.0650 before entering oversold territory.
4-Hour Chart
The EUR/USD hovers below the 200-day and 50-day EMAs, reaffirming the bearish price signals. Weak industrial production figures from Italy would support bets on the ECB to leave rates unchanged on Thursday. A more dovish outlook would bring sub-$1.07 and the $1.06342 support level into play.
Softer US inflation figures could push the bulls towards the 50-day EMA and the $1.07635 resistance. The EUR/USD may encounter selling pressure between $1.0760 – $1.07635, with the 50-day EMA confluent with the $1.07635 resistance level.
The 14-4 Hourly RSI at 48.43 indicates a EUR/USD fall to $1.0650 before entering oversold territory.
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