EUR/USD forecast: Forex Friday - August 9, 2024

Investors have tapered their expectations for aggressive rate cuts from the Fed, amid calmer market conditions in this second half of the week after pricing in an emergency cut before the central bank’s September meeting. Still, market pricing point to a potential 50-basis-point cut in September. Meanwhile, the stronger Eurozone inflation data from last week has raised the risks the ECB may skip a cut in September. With 3 more meetings to go before the year is out, a total of 50 basis point worth of cuts by the ECB are expected, which is lower than market’s implied cuts of around 100 basis points by the Fed. This should mean limited downside for the euro and a positive EUR/USD forecast as we head deeper into Q3. But we will need continued calmness in financial markets for the scenario to play out. However, if markets turn volatile again then haven flows into USD should prevent the EUR/USD from climbing significantly beyond 1.10 handle. After a disappointing jobs report last week, the next important US data is the CPI report in the week ahead.

Markets calmer

Following the recovery in the equity markets and calmer conditions across asset crosses, the markets have started to warm towards pro-cyclical currencies after initially favouring haven ones or those where interest rates are lower, when all the turmoil started last week after yen-funded carry trades came under intense pressure. Thursday’s publication of a better-than-expected jobless claims report, followed a stronger ISM services PMI on Monday and soothing comments from Fed officials. All these factors have helped to ease concerns over a sharp slowdown in the US. In Japan, sentiment has recovered somewhat by reassuring comments from the Bank of Japan's Deputy Governor, which has helped to alleviate pressure on all yen pairs after last week’s bigger-than-expected rate hike from the BoJ sent Japanese bond yields and the yen soaring.

As a result, swap traders have scaled back their expectations for aggressive Fed rate cuts in 2024. The market is now pricing in around 40 basis points of reductions by September. The potential for higher bond yields appears limited, as the Fed and other central banks may be recognising the need to shift back to more neutral policy stances, and soon.

Before discussing the macro events in the week ahead, let’s have a quick look at the EUR/USD chart first…

EUR/USD forecast: technical analysis

Source: TradingView.com

Price action on the EUR/USD has been far from exciting in the last few days, with investors largely focused on the equity market volatility. Still, the underlying trend is bullish given the fact that rates remain above both the 21- and 200-day moving averages and prior resistance at 1.0900, a level which has now become an important short-term support. The recent break of the bearish trend that had been in place since July of 2023 around the 1.0800 area is an additional bullish sign. What is lacking though is a clean trend. This makes the EUR/USD a less-than-ideal pair to trade but that could change if we see a more pronounced sell-off in the dollar next week with CPI data on tap.

Below 1.0900, the next support zone is seen around 1.0835-1.0850, where the 200-day average meets the point of origin of last week’s bullish breakout. The line in the sand for me is at 1.0777, last week’s low. Any move below that level would invalidate this bullish EUR/USD forecast.

Week ahead: US CPI, China Industrial Production and UK data dump

As we look ahead, there’s not much US data on the calendar today, though Canadian employment reports could stir volatility in the Canadian dollar. Next week, all eyes will be on US inflation figures, alongside key industrial data from China and a series of economic updates from the UK. From the Eurozone, we will have ZEW surveys on Tuesday followed on Wednesday by data on employment, GDP and industrial production.

US CPI

Wednesday, August 14

After the latest jobs report and ISM manufacturing PMI disappointment, all attention will be CPI figures scheduled for Wednesday. A surprising weak inflation report could deliver a big blow for the US dollar, which has lost some of its yield advantage lately. A 0.2% month-on-month for both headline and core readings are expected. If CPI turns out to be hotter, this would argue against accelerated rate cuts that the markets have priced in. Else, markets could grow in confidence with its roughly 100bp of expected cuts in 2024.

China Industrial Production

Thursday, August 15

The recent falls in key commodity prices and China’s stock markets was attributed to concerns about the health of the world’s second largest economy. Whether those concerns intensify, or ease, will partly depend on key data releases slated for Thursday. As well as industrial production, we will have the latest retail sales and fixed asset investment figures to look forward to.

UK Macro Highlights

All week

Following the Bank of England’s decision at the start of the month to cut interest rates, the GBP/USD and GBP crosses have remained under pressure amid a split Monetary Policy Committee, voting 5-4 in favour of the cut. This has raised question marks about how the MPC might vote in future policy decisions, putting this week’s data dump in sharp focus. Jobs and wages (Tuesday), CPI (Wednesday), and GDP (Thursday) and retails sales (Friday) should keep GBP and FTSE busy.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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