EurUsd Weekly Outlook for September 18, 2023 – Inflation Remains Resilient

• The United States grapples with resurgent inflation following a favorable period. The 3.7% rate is unlikely to be a flash in the pan, given the impact rising oil prices and wage hikes in the auto sector could have on consumer prices.
• In Europe, the ECB opts to raise interest rates by another quarter-point, taking them to 4.5%. Lagarde’s dovish tones, however, seem to suggest that a pause in rate hikes is imminent.
• As expected, EurUsd dips but doesn’t break through, affirming the strength of recent support levels. A significant decline would pave the way to parity.

The ECB Draws a Line

Recent U.S. inflation data confirms the end of a series of seasonal tailwinds that had lasted until June. Compared to 2022, there was a sustained cooling of consumer prices, but since July, prices have started to climb again. The August data, which exceeded expectations, confirmed this trend.

Despite a headline figure of 3.7%, the Federal Reserve (FED) seems inclined to stand pat in its meeting on September 20, as it grapples with how to cool the economy without stoking inflation further. With oil prices back around $90, consumer price changes are likely to remain above 3% for the foreseeable future.

Announced strikes by auto-sector unions demanding 20% higher wages are set to further fan the flames of inflation.

On the plus side for the Federal Reserve, core inflation—which excludes more volatile components such as energy and food—has remained stable.

However, the Federal Reserve Bank of Chicago’s weekly financial conditions report continues to flag weakening in the American productive fabric, now at its lowest since February 2022. Meanwhile, the shadow of impeachment looms over President Joe Biden. In the coming weeks, we’ll find out how the impeachment proceedings initiated by Democratic Speaker McCarthy will actually impact Biden’s re-election bid.
Meanwhile, in Europe, the European Central Bank (ECB) has decided to raise interest rates by another quarter-point. ECB President Lagarde struck a more dovish tone, confirming that inflation continues to decline, but expectations are for it to remain high for a considerable period. According to Frankfurt’s forecasts, inflation will not dip below 2% until 2025, suggesting that while the end of rate hikes may be in sight, an easing phase is less certain.

The economies of Italy, Germany, and France are notably slowing down, and the ECB must certainly take this into account, although it cannot make a move before the FED does. The risk of euro depreciation, leading to a spike in imported inflation—especially with oil at $90—calls for caution. Growth forecasts through 2025 have all been revised downward.

Technical Analysis – EurUsd Struggles to Hold Support Levels

The battle between short-term bulls and long-term bears in the EurUsd exchange rate market enters a new chapter in a saga that has been ongoing for months.

The 200-day moving average had been supporting the EurUsd rate, allowing it to recover each time it dipped. This time, however, a break below the level will require a stable close above 1.08 to restore the bull market—a scenario that currently appears unlikely.

The 20-day moving average, on the other hand, has been guiding the downtrend since July and is now breaking below the 200-day moving average—a non-traditional “death cross.” A similar occurrence in 2021 marked the start of the euro’s bear market. So, watch for developments this week.

The long-term analysis seems to corroborate what has been recently observed. Over a 12-month span, the EurUsd rate has experienced a +10% rate of change, hinting at a potential peak similar to those seen in 2018 and 2021.

Should the euro manage to rally from here, a move towards the 1.12/1.13 resistance levels would be seen as a buying opportunity for the U.S. dollar. A fall below the 38.2% Fibonacci retracement level of the entire uptrend, which stands at 1.0610, would clear the path for EurUsd towards parity.

The narrative suggests that the EurUsd is showing signs of reaching a definitive peak, as corroborated by multiple time frames. It’s a market dynamic that warrants close attention from investors and policy-makers alike.