EUR/USD Weekly Forecast: US PCE inflation as a first hint to Fed’s next move

• The Federal Reserve trimmed the benchmark rate by 50 basis points.
• United States Personal Consumption Expenditures Price Index under scrutiny.
• EUR/USD eases ahead of the weekly close, but bulls aim for higher highs.

The EUR/USD pair flirted once again with the 1.1200 threshold this week but finally settled at around 1.1160, holding onto modest gains. The pair has been trying to conquer the mark since mid-August in anticipation of the Federal Reserve’s (Fed) monetary policy announcement.

Federal Reserve’s new monetary cycle

The Fed delivered a 50-basis-point (bps) rate cut, kick-starting a new policy cycle in an aggressive manner. As a result, the US Dollar (USD) fell sharply, albeit then, Chair Jerome Powell poured enough cold water to avert panic action across financial boards.

The decision was made not only because inflation levels are closer to the Fed’s goal of around 2% but also to support the economy.  The Federal Open Market Committee (FOMC) noted they have “gained greater confidence that inflation is moving sustainably” towards their goal.

As a result, the Summary of Economic Projections (SEP), more commonly known as dot plot, showed FOMC members are anticipating another 50 bps this year, 100 bps trims in 2025, and 50 bps more in 2026 to a terminal rate of 2.9%. As Powell noted, they are on their way to a more neutral rate.

Powell, however, clarified that future decisions will continue to depend on macroeconomic data and that those will made meeting by meeting. His cautious words kept fears in check. Following the initial rallies in Wall Street, US indexes closed with modest losses, while the USD recovered the lost ground, only to resume its slide when a new day started. And it is quite logical: Federal Reserve’s officials opted for an aggressive move amid unexpressed concerns about economic progress. The Fed’s decision to maintain rates at record highs for longer has posed a significant risk for growth. Luckily for Powell & co, it worked pretty well, as the United States (US) will likely dodge a recession.

Easing government bond yields, with the 2-year Treasury note yielding less than the 10-year one, is a good sign of confidence about a potential recovery.

The Fed key rate is now between 4.75% and 5%. It is worth remembering the European Central Bank (ECB) has already trimmed interest rates, with the benchmark rate on the Deposit Facility now standing at 3.5%. Despite the Fed’s aggressive measure, it’s still better to hold USD than Euro.

Europe keeps struggling

Other than that, European data kept disappointing. The German ZEW Survey showed a sharp contraction in Economic Sentiment, with the index plummeting in the country to 3.6 and in the Eurozone to 9.3 in September. The assessment of the current situation in Germany worsened to -84.5 from  -77.3. Additionally, the EU confirmed that the Harmonized Index of Consumer Prices (HICP) rose by 2.2% in the year to August, while the monthly increase was downwardly revised to 0.1%. Finally, on Friday, the EU reported that September’s preliminary Consumer Confidence improved to -12.9 from -13.5 in August.

Across the pond, the US reported that Retail Sales increased by 0.1% in August, better than the 0.2% decline expected.

Focus shifts to inflation

The upcoming week will start with the Hamburg Commercial Bank (HCOB) and S&P Global releasing the preliminary estimates of the September Purchasing Managers Indexes (PMIs) for European economies and the US on Monday.

Additionally, on Thursday, the US will release the final estimate for the second quarter of Gross Domestic Product (GDP) and August Durable Goods Orders. Finally on Friday, the country will publish the August Personal Consumption Expenditures (PCE) Price Index, the Fed’s favorite inflation gauge. Investors will be looking for divergences in the figure to rush to price in what the Fed may do in November. Financial markets are counting on a 25 bps rate cut, yet if inflation falls much more than anticipated, it will open the door for speculation of another 50 bps trim.

EUR/USD technical outlook  

The EUR/USD pair needs to clearly conquer the 1.1200 mark to confirm what technical readings suggest: That is, buyers are in control. In the weekly chart, technical indicators have extended their upward slopes within positive levels, maintaining their upward strength. At the same time, the pair met buyers around a flat 200 Simple Moving Average (SMA), providing dynamic support in the 1.1050 price zone. The 20 and 100 SMAs, in the meantime, grind north below the longer one, reflecting increased buying interest.

EUR/USD  is also bullish in its daily chart despite the bullish momentum receding. The 20 SMA provides support in the 1.1090 region, while the longer moving averages grind higher far below the shorter one. Finally, technical indicators have turned marginally lower but remain within positive levels.

Support, beyond the mentioned 1.1090 and 1.1050, comes at the 1.1000 mark, while once above 1.1200, the pair could run towards 1.1240 and 1.1300, with a longer-term aim of 1.1470.