EUR/USD forecast: US PPI in focus ahead of CPI after soft ZEW survey

The EUR/USD edged lower on the back of sentiment data showing a sharp drop in investor optimism, although the losses were contained with investors awaiting the release of the first of the two key US inflation reports this week: PPI today and CPI tomorrow. This week’s inflation data is likely to have a much larger influence on the EUR/USD forecast than Eurozone data. I maintain a modestly bullish view on the pair owing largely to the recent weakness in US data than anything to do with the Eurozone.

Soft ZEW survey unlikely to be a game changer

This ZEW survey of about 300 German institutional investors and analysts is the first activity data of every month and asks respondents to rate the relative 6-month economic outlook for Germany and separately for Eurozone. Well, the result of the latest survey pointed to a grim outlook for both regions. The German ZEW Economic Sentiment plunged from 41.8 to 19.2, far lower than expected. On the eurozone outlook, they were even less optimistic, with the Eurozone ZEW Economic Sentiment falling to 17.9 from 43.7 previously.

Given that the ZEW can help build expectations for the Ifo and PMI indices, which track business sentiment, this was clearly a far from ideal scenario and we saw the EUR/USD drop around 25-30 pips from the day’s high in response.

However, the ZEW survey is not a game-changer when it comes to the near-term EUR/USD forecast. Clearly the market has already factored in weak growth in the Eurozone. It is the persistence in inflation which is preventing the ECB from cutting rates more aggressively is what matters right now.

Why isn’t the EUR/USD falling?

In addition to concerns over inflation persistence in the Eurozone, the improvement in risk appetite in recent days is also working against the euro bears who must be frustrated by the lack of volatility despite weaker Eurozone data. Then there is the US dollar side of the story to consider, too. The latter is far more important in my view than any of these factors mentioned. With that in mind, this week’s inflation data from the US has the potential to significantly impact the EUR/USD forecast should we see a sharp deviation from expectations.

PPI, CPI and retail data among US data highlights this week

Before the CPI data is released on Wednesday, we'll first receive the PPI report later today. Given the recent disappointing jobs report and ISM manufacturing PMI, a weaker-than-expected inflation report could have a notable impact on the US dollar, which has recently lost some of its yield advantage.

Economists are forecasting a +0.2% month-on-month increase for both headline and core CPI and PPI inflation figures. If the CPI is higher than anticipated, it might challenge the market’s expectations for accelerated rate cuts. On the other hand, a lower CPI could boost market confidence in the expected roughly 100 basis points of rate cuts in 2024, potentially putting more downward pressure on the dollar. If so, we could see the EUR/USD climb towards the 1.10 handle.

Additionally, this week will bring some US activity data, including July retail sales on Thursday and earnings reports from retailers like Walmart and Home Depot. These will offer insights into US consumer health and whether tight monetary policy is affecting consumption. Analysts expect weak activity data, which could further weaken the US dollar if their predictions prove accurate.

EUR/USD forecast: technical analysis

Source: TradingView.com

Recent price movements in EUR/USD have been relatively dull as traders await key economic data. However, the overall trend remains positive, as rates are holding above both the 21- and 200-day moving averages and have found short-term support at the previously significant resistance level of 1.0900. The recent breach of the bearish trend that persisted since July 2023 around the 1.0800 mark adds to the bullish outlook. Despite this, the trend lacks momentum, making EUR/USD a less favourable trading pair at the moment. This could change if the dollar experiences a significant sell-off this week with the upcoming inflation data.

If the EUR/USD drops below 1.0900, then the next support level to watch is seen around 1.0835-1.0850, where the 200-day moving average intersects with the point of last week’s bullish breakout. The line in the sand for me is at 1.0777, the most recent low. A decline below this level would undermine the current bullish EUR/USD forecast.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R