EUR/USD Weekly Forecast: Could the Federal Reserve pave the way for a September cut?

• Macroeconomic data imbalances may end up benefiting the US Dollar.
• European tepid growth may soon take its toll on the Euro.
• EUR/USD maintains the bullish bias in the daily chart despite absent weekly progress.

The EUR/USD pair edged lower in the fourth week of July, trading marginally lower in the 1.0850 region ahead of the close. The US Dollar started the week on a strong footing, but the momentum faded following the release of United States (US) first-tier data that helped improve the market’s mood.

Tepid European data

At the same time, Euro buyers had little to cheer. EUR/USD bullish potential was limited by tepid European data reflecting the elevated risk of a recession. According to the Hamburg Commercial Bank (HBOC), the private sector stood near stagnation at the beginning of the third quarter, as the flash Purchasing Managers Indexes (PMIs) came in worse than anticipated. Manufacturing output shrank in July, resulting in the Composite PMI falling to 50.1 from 50.9 in June, its lowest in five months.

Furthermore, the German private sector economy “slipped back into contraction at the start of the third quarter, weighed down by a worsening performance across the country’s manufacturing sector,” the report showed.

The European Central Bank (ECB) is well aware of the situation and trimmed rates despite persistent inflationary pressures. In fact, European policymakers are likely to deliver a second interest rate cut in September, fearing an unmanageable recession. Of course, this would never be said out loud.

United States may dodge even a soft landing

Across the pond, macroeconomic data was far more encouraging. The S&P Global flash PMI data showed business activity growth in the United States (US) edged up to its fastest for 27 months in July, with the services sector still outperforming the manufacturing one.

Furthermore, the preliminary estimate of the Q2 Gross Domestic Product (GDP) showed that the economy grew at an annualized pace of 2.8%,  much better than the 2% expected and the previous 1.4%. At the same time,  the quarterly core Personal Consumption Expenditures Price Index rose 2.9% QoQ, easing from the 3.7% posted in the first quarter, yet above expectations of 2.7%. Furthermore, the GDP Price Index rose 2.3% in the same period, below the market expectation of 2.6%.  

Finally on Friday, the US reported the June core PCE Price Index, which rose 0.2% MoM, above the 0.1% anticipated. The annual reading remained unchanged at 2.6%, also surpassing expectations. Nevertheless, the news fell short of affecting the odds of an interest rate cut in September.

The Federal Reserve (Fed) will take center stage next week as the central bank announces its decision on monetary policy. Interest rates are widely anticipated to remain unchanged, although investors hope policymakers will pave the way towards a September announcement.

The United States will also publish the July Nonfarm Payrolls report on Friday and the official ISM Manufacturing PMI for the same month.

The European macroeconomic calendar will include the preliminary estimates of the German and the Eurozone Q2 GDP and inflation data for the same month.

EUR/USD technical outlook  

The weekly chart for EUR/USD shows the pair has made little progress. It retains a neutral-to-bullish stance, as technical indicators have lost their directional strength but hold within positive levels. At the same time, directionless 20 and 100 Simple Moving Averages (SMAs) stand below the current level, with the shorter one providing dynamic support at around 1.0790. The 200 SMA, in the meantime, provides dynamic resistance at around 1.1080.

Bulls can build hope based on the daily chart. Technical indicators bounced from around their midlines after correcting the overbought conditions reached mid-July, offering modest upward slopes. At the same time, a bullish 20 SMA has provided dynamic support, with the pair recovering pretty fast on slides below it. Furthermore, the latest keeps advancing above the longer ones, supporting the case of another leg higher.

As long as the pair holds above the 1.0800 level, the odds for a bearish extension remain limited. A break below it, however, exposes the 1.0740 area en route to 1.0660. Should the latter give up, the year low at 1.0600 comes next. The main resistance level is 1.0947, the monthly high, followed by the 1.1000 mark.  Gains beyond the latter should result in EUR/USD testing 1.1080, followed by the 1.1140 price zone.