EUR/USD Forecast: Again under pressure on dollar strength after US CPI

EUR/USD Current Price: 0.9998

• Dollar rebounds sharply following US CPI data.
• Stocks move lower, yields higher after inflation figures.
• EUR/USD ends recovery dramatically, back to the parity zone.

The EUR/USD turned sharply lower on Tuesday, erasing three days of gains and fell to the parity area. The pair pulled back from three-week highs to the lowest level since Thursday following US inflation data that triggered a rally of the US dollar across the board. Stocks and Treasuries tumbled after the numbers.

The US dollar arrived at the CPI report with a negative streak and looked weak amid speculations of a negative reading for August. Instead, the Consumer Price Index rose 0.1% on a monthly basis and the annual rate dropped from 8.5% to 8.3%. The core CPI (which excludes food and energy) rose 6.3% from a year ago, above the 6.1% of market consensus. It is the last critical report ahead of next week’s FOMC meeting. On Wednesday, the Labor Department will release the Producer Price Index for August. Another reading above expectations could strengthen the dollar further.

The greenback now seems poised to hold firm ahead of the Fed decision next week. A 75 basis points hike is fully priced in and even some analysts started to call for a 100 bps hike. US yields jumped on Tuesday with the 2-year yield at fresh multi-year highs and the 10-year above 3.40%.

In Europe, the German September ZEW survey dropped more than expected in August. The Economic Sentiment index fell to -61.9 in September from -55.3 in August, while the Current Situation index fell to -60.5 down from -47.6. The deterioration in sentiment continues. Despite the negative economic outlook and the energy crisis, expectations are still for another 75 basis points rate hike from the European Central Bank at the next meeting in October.

EUR/USD short-term technical outlook

The EUR/USD pair approached 1.0200 again and then tumbled to 0.9988, breaking key short-term support levels like 1.0060. It bottomed at 0.9980 and it is hovering around 1.0000. The bias continues to point to the downside and more losses seem likely while under 1.0035. The next support stands at 0.9970, followed by 0.9910. A daily close below 0.9900 would point to fresh multi-year lows.

So far, the pair is back under the 20-day SMA, currently at 1.0009. The recovery of the euro failed to surpass not only 1.0200 but also a downtrend line. Tuesday’s decline shows that the negative dominant pressure remains in place. If the euro manages to rise back above 1.0060 over the next hours, it would alleviate the bearish pressure. The critical level on the upside is 1.0200, with a close above having the potential to change the short-term bias from bearish to neutral/bullish.

Support levels: 0.9995 0.9965 0.9910

Resistance levels: 1.0055 1.0110 1.0145

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