EUR/USD Weekly Forecast: US Dollar bullish case building up

• Central banks moved further away from a potential monetary policy pivot.
• Inflation easing at a slower-than-anticipated pace revived the market’s concerns.
• EUR/USD’s bulls keep losing interest, 1.0515 comes as the next relevant support.

The EUR/USD pair ends a third consecutive week in the red and at its lowest since early January. The US Dollar extended its rally across the FX board on the back of concerns the United States Federal Reserve (Fed) would extend the monetary policy tightening amid inflation easing at a slower-than-anticipated pace.

Fed’s hawkish message spurs risk aversion

Speculation of a possible Fed’s pivot cooled following the release of the US Consumer Price Index (CPI), as January inflation rose at an annualised pace of 6.4%, barely easing from the previous 6.5% and higher than the 6.2% expected. Furthermore, the Producer Price Index (PPI) was up by 6% in the same period, higher than the 5.4% anticipated by financial markets. The figures reinforced Fed officials talking about not having done enough yet on price pressures.

 Cleveland Federal Reserve Loretta Mester was probably the clearest. Speaking on Thursday, she said that the upside risks to inflation remain in place, adding that the return to price stability will be painful. She then noted that how far the Fed could go above 5% would depend on data and said CPI data showed there’s still more to do on cooling inflation, which remains too high. Finally, she said that, during the most recent FOMC meeting, there was a “compelling case” for a 50 basis point increase.

Speculative interest has realized the American central bank is farther away from a pivot in monetary policy than previously anticipated. Stock markets fell, with the Dow Jones Industrial Average posting a fresh three-week low and fueling demand for the safe-haven US Dollar.

Europe’s economic setback maintains ECB on the hawkish path

Across the pond, Europe continues to battle with slowing growth and persistent price pressures. The European Central Bank (ECB) shifted to hawkish mode a few months ago, and throughout this week, members of the Governing Council reinforced the message. Their tough stance has already been priced in, and ECB officials’ words fell on deaf ears.

European Central Bank (ECB) policymaker Francois Villeroy de Galhau said on Friday that the timing for rate cuts s not a question for this year, adding that after the March meeting, the central bank will probably go above 3%. Earlier in the week, President Christine Lagarde reiterated the ECB will hike rates by 50 bps in March, as despite falling energy prices, inflation is still too high while economic activity is expected to remain weak in the near term.

Data-wise, Europe confirmed the economy grew at an annualised pace of 1.9% in the last quarter of 2022, while the quarterly Gross Domestic Product (GDP) posted a modest 0.1% increase. Industrial Production in the Euro Zone fell by 1.7% YoY in December, missing the market expectations and yet another sign of slowing economic progress.

Inflation under the spotlight

In the upcoming week, updates on inflation will keep market players busy. The Euro Zone and Germany will release the final estimates of their January Consumer Price Index (CPI). On Friday, the United States will publish the January Core Personal Consumption Expenditures Price Index, released by the US Bureau of Economic Analysis and the US Federal Reserve favorite’s inflation measure. Ahead of the latter, the FOMC Meeting Minutes will be released on Wednesday. Given the latest market developments, the document may have a limited impact on price action, as the market is already pricing in higher rates for longer.

The macroeconomic calendar will also include the preliminary estimates of the February S&P Global PMIs and the second estimate of the United States Q4 Gross Domestic Product. Germany will also unveil a revision of its Q4 GDP.

 EUR/USD technical outlook

The EUR/USD pair trades near a weekly low of 1.0612, further below a critical Fibonacci level, the 61.8% Fibonacci retracement of the 2022 yearly slide at 1.0745, and aiming to test the 50% retracement of the same slump at 1.0515.

Technical readings in the weekly chart suggest increased selling interest, although a longer-term decline is not yet clear. The pair continues to retreat from a bearish 100  Simple Moving Average (SMA), which slides below the 200 SMA. Nevertheless, the 20 SMA keeps heading firmly north below the current level. Finally, technical indicators have turned sharply lower, with the Momentum indicator approaching its midline with an almost vertical slope, anticipating more downward pressure on the pair.

The bearish case seems stronger in the daily chart. Technical indicators have extended their slides within negative levels while maintaining their bearish slopes at fresh three-month lows. The 20 SMA, in the meantime, gains downward traction above the current level, providing dynamic resistance at around 1.0795. On a positive note, the 100 SMA has crossed below a flat 200 SMA, both well below the current level.

The aforementioned Fibonacci resistance level at 1.0745 provides resistance since early February, although a clear break above 1.0800 is now needed for bulls to regain confidence. The pair could then extend its gains towards the 1.0900 price zone and change the current bearish picture.

Support can be found at 1.0600 and the 1.0515 50% retracement. If EUR/USD loses the latter, the next relevant level to watch is 1.0410, en route to 1.0280, the 38% retracement of the 2022 slump.

EUR/USD sentiment poll

According to the FXStreet Forecast Poll, the EUR/USD pair would likely remain under pressure in the near term, as 80% of the polled experts are betting for lower lows. On average, the pair is at 1.0581, although bouncing afterwards.  Bulls are a majority in the monthly and quarterly perspective and raising as time goes by. Still, the 3-month view sees the pair on average at 1.0744.

The Overview chart reflects the near-term negative sentiment. Most targets accumulate below the current level, turning the moving average sharply down. The monthly moving average offers a modest bearish slope, with the pair seen trading in the 1.0400/1.1000 area. The moving average is flat in the quarterly view, losing its former bullish slope. Still, the largest accumulation of possible targets is now in the 1.0700/1.1200 area.