EUR/USD Weekly Outlook: Optimism vs. the Resilient US Dollar

Inflation in both the United States and the Euro Zone didn’t ignite as expected, bringing a sigh of relief to financial markets. Yet, the US Dollar remains resilient. In the upcoming week, attention turns to key economic data, including the US ADP survey and Nonfarm Payrolls report.

The EUR/USD pair experienced a significant drop to 1.0487 during the week, marking its lowest level since early March. Investors continued to flock to the US Dollar as a safe haven. This risk-averse sentiment stemmed from central banks’ recent monetary policy decisions, where most policymakers, despite holding their fire, reiterated the persistently high inflation risks and the need for prolonged higher interest rates to keep inflation in check.

The first half of the week saw the absence of significant news, which favored the US Dollar’s strength. However, the currency faced pressure due to extreme overbought conditions and better-than-expected inflation-related data.

Cooling Inflation Trends

Germany released preliminary estimates of the September Harmonized Index of Consumer Prices (HICP) on Thursday, showing a 4.3% year-on-year increase. While this was slightly below the 4.5% expected by the market, it marked a significant improvement from the 6.4% recorded in August. Similarly, the Euro Zone HICP for the same period also came in lower than expected, with the European Central Bank’s preferred gauge of inflation rising by 4.3% YoY in September, down from 5.2% in August. The core annual HICP rate printed at 4.5%, lower than the expected 4.8% and below the previous 5.2%.

On the other side of the Atlantic, the US released the August Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation measure. It showed an annual core PCE price index increase of 3.9%, a decrease from the 4.3% rate seen in July, with a modest 0.1% monthly increase.

Concerns about overheating price pressures had raised speculation about more aggressive central bank actions in the near future, heightening the risk of a significant economic downturn.

Softer Inflation Eases Concerns

However, the softer-than-expected inflation data points in the opposite direction. Central banks may maintain their recent wait-and-see stance, keeping another rate hike in reserve but hoping not to implement it.

Looking ahead to next week, the macroeconomic calendar offers several important figures. These include the September US ISM Manufacturing PMI, S&P Global’s release of Manufacturing PMIs for both the EU and the US, and later in the week, Services and Composite PMIs for both economies. Additionally, the EU will publish August Retail Sales and the Producer Price Index (PPI) for the same month. In the US, the focus will shift to employment, with the release of the September ADP survey on private job creation ahead of the Nonfarm Payrolls (NFP) report for the same month. The NFP is expected to show the addition of 150,000 new positions in September, with the Unemployment rate projected to ease to 3.7% from 3.8% in August.

– From a technical standpoint, the price appears to be in a retracement phase, with the 50% Fibonacci area and the 61.8% level potentially serving as a pullback range. This range may lead to a reversal of the pullback and a continuation of the downtrend.