EUR/USD Forecast: Inflation Pressure Puts ECB in Tight Spot, EUR to USD Suffers

Overview

The EUR/USD slipped by 0.07% to wrap up the day at $1.08720 on Thursday. A bullish morning session saw the EUR/USD strike a midday high of $1.09183. However, US economic indicators and hawkish Fed bets sent the EUR/USD to a late low of $1.08563 before steadying.

Eurozone Inflation Numbers to Draw ECB Scrutiny

It is a relatively busy morning on the European economic calendar. Finalized Eurozone inflation numbers for July will influence ECB sentiment. ECB Executive Board members remain focused on core inflation, which continued to defy gravity.

According to prelim figures, the Eurozone annual core inflation rate stayed at 5.5% in July. Revisions to the prelim core inflation figure will move the dial. However, investors should also consider the headline number. According to prelim numbers, the annual inflation rate softened from 5.5% to 5.3% in July.

Inflation remains elevated, leaving the ECB under pressure to tighten monetary policy further to bring inflation to target. Higher interest rates reduce spending power, leading to a fall in spending, easing demand-driven inflationary pressures.

With inflation still the hot topic among central bankers, ECB Chief Economist Philip Lane will speak today, delivering an ECB Podcast on the role of banks in fighting inflation. We expect EUR/USD sensitivity to comments relating to the finalized inflation figures and ECB monetary policy goals to tame inflation.

Hawkish FOMC Member Chatter Would Tip the Scales in Favor of the Fed

After a busy week on the US economic calendar, there are no US economic indicators to consider this afternoon.

However, the latest US retail sales, Jobless Claims, and Philly Fed Manufacturing Index numbers support a more hawkish Fed monetary policy outlook. When considering the FOMC meeting minutes, hawkish FOMC member comments would raise the bets on a September Fed rate hike.

In contrast, the ECB remains data dependent, with the euro area macroeconomic backdrop a factor to consider while the US economy runs hot. Monetary policy and economic divergence continue to favor the dollar, leaving the EUR/USD at risk of sub-$1.08.

EUR/USD Price Action

Daily Chart

The Daily Chart showed the EUR/USD remain above the lower level of the 1.0900 – $1.0850 support band. After a bearish Thursday, the EUR/USD sat below the 50-day EMA while holding above the 200-day EMA, sending bearish near-term but bullish longer-term price signals.

A EUR/USD move through the upper level of the $1.0850 – $1.0900 support band would give the bulls a run at the 50-day EMA. However, failure to move through the 50-day EMA would leave the lower level of the $1.0900 – 1.0850 support band and 200-day EMA in play.

Looking at the 14-Daily RSI, the 39.03 reading reflects bearish sentiment. The RSI aligns with the 50-day EMA, signaling a fall through the $1.0900 – 1.0850 support band to target the 200-day EMA and $1.08.

4-Hourly Chart

Looking at the 4-Hourly Chart, the EUR/USD sits below the upper level of the $1.0900 – $1.0850 support band. The EUR/USD also sits below the 50-day and 200-day EMAs, affirming bearish near-term price signals.

The 14-4H RSI at 43.30 reflects bearish sentiment, with selling pressure outweighing buying pressure. Significantly, the RSI suggests further losses and a fall through the lower level of the $1.0900 – $1.0850 support band to target $1.08.

Price action today hinges on the euro area inflation figures and central bank speeches.