EUR/USD Weekly Forecast: Sentiment likely to keep undermining US Dollar

• The United States Consumer Price Index came in softer than anticipated in October.
• Market players increased bets against additional monetary tightening from the Fed.
• EUR/USD aims to extend gains towards the 1.1000 psychological mark.

The EUR/USD pair ends the week with substantial gains, not far below a fresh two-month high of 1.0895. The US Dollar plummeted on Tuesday following the release of softer-than-anticipated United States (US) inflation-related figures.

The US Consumer Price Index (CPI) remained unchanged on a monthly basis in October and rose by 3.2% from a year earlier. The annual core reading grew 4%, easing slightly from 4.1% in September.

Market resumes betting against the Fed

As a result of easing price pressures, speculative interest dropped the USD while lifting bets the Federal Reserve (Fed) will hike interest rates no more. At the same time, investors increased bets for rate cuts in the first half of 2024 despite multiple Fed officials’ warnings rates should remain higher for longer.

Federal Open Market Committee  (FOMC) members have also left the door open for additional hikes should price pressures continue, but after two consecutive on-hold decisions, markets had a hard time believing them.

The optimistic stance was confirmed on Wednesday when the US published the October Producer Price Index (PPI), indicating wholesale prices shrunk 0.5% on month.

European Central Bank in the higher for longer pat

The European Central Bank (ECB) also refrained from hiking rates in its last two monetary policy meetings, with money markets currently pricing 100 basis points (bps) rate cuts by December 2024, despite comments from President Christine Lagarde. She said this week that inflation would come down to the 2% target if interest rates are kept at their current levels for “long enough,” adding she does not expect it to happen “in the next couple of quarters.”

Generally speaking, speculative interest believes the tightening cycle is over and that central banks will need to move in the opposite direction. When and for how much at a time would lead the way through 2024. Meanwhile, financial markets will keep an eye on economic developments.

Economic growth, the next market driver

Growth imbalances will define currencies’ self-strength, and in that matter, the USD will likely outpace the Euro as the American economy continues to probe resilience, while the Eurozone setback has yet to meet a bottom.

The EU unveiled on Tuesday the second estimate of its Q3 Gross Domestic Product (GDP), confirming it increased at an annual rate of 0.1%. In the same period, the US annual rate of growth printed 2.9%. The EU also unveiled the final estimate of the October Harmonized Index of Consumer Prices (HICP), which was confirmed at 2.9%.

The ongoing USD decline that benefits its European rival is the result of sentiment trading, yet at some point, the Greenback will start recovering on fundamental advantages. The US is heading towards a soft landing in what seems to be the worst case scenario, while a recession seems more certain on European shores.

There’s one caveat: a continued slide in inflation is far from certain. So far, energy prices remain contained, yet resurgent Oil prices could easily impact inflationary levels and revive concerns about potential rate hikes and economic deterioration.

The US Dollar is also being hit by higher bond prices. Treasury yields further eased, ending the week at their lowest in almost two months amid hopes the Federal Reserve will soon start to cut rates.

Fundamentals and sentiment

The macroeconomic calendar will feature some interesting figures next week. The Fed will unveil the Minutes of its latest meeting on Tuesday, although the document will hardly affect the FX board after the encouraging US CPI figures. The country will also publish Durable Goods Orders, although financial markets will likely wait for Thursday, when S&P Global will release the preliminary estimates of the November Purchasing Manager Indexes (PMIs) for the EU. US figures will be out on Friday, when Germany will publish the second estimate of the Q3 GDP. In the meantime, the ECB will release the Monetary Policy Meeting Accounts.

EUR/USD technical outlook

The EUR/USD pair met buyers at 1.0824 after the aforementioned multi-month peak and currently trades at around 1.0870. The pair seems poised to extend its advance, according to technical readings in the weekly chart, although it needs some further confirmation. The current candle shows buyers defending the downside at around a mildly bearish 100-week Simple Moving Average (SMA), and the price comfortably developing above the 20-week SMA for the first time since early in August. Technical indicators, in the meantime, head firmly north, although the Momentum indicator remains below its 100 level. The Relative Strength Index (RSI) indicator, however, is already at 56, in line with an upward continuation.

EUR/USD is bullish according to the daily chart, although it has lost strength. Still, a steep decline remains out of the picture for now, with potential slides likely to be corrective. The pair is comfortable above the 100-day and 200-day SMAs, both directionless in the 1.0790-1.0800 price zone, providing support. At the same time, the bullish 20-day SMA keeps advancing below the longer ones, currently in the 1.0680 area. Technical indicators have eased from extreme overbought readings but remain nearby, with uneven directional strength.

Finally, the pair trades around the 50% Fibonacci retracement of the 1.1275-1.0447 yearly slump. The 61.8% retracement is located at 1.0960, a potential target for the upcoming week. EUR/USD will then face resistance at around the 1.1000 psychological threshold, while once firmly above the latter, the following levels to watch are 1.1060 and 1.1120. Support, on the other hand, can be found at 1.0790, followed by 1.0750 and 1.0710.

EUR/USD sentiment poll

According to the FXStreet Forecast Poll,  the EUR/USD pair may shed some ground next week, as, on average, it is foreseen at 1.0797. Most individual traders have changed their bets after the US CPI release, affecting also the medium and longer term. The pair is seen neutral in the monthly perspective and bullish in the quarterly one, targeting the 1.1000 area.

In the Overview chart, the moving averages head firmly north, with increased bets above the 1.1000 threshold in the monthly and quarterly views. The bottom of the potential range was drastically lifted, with quite a limited number of bets below the 1.0700 level.