The EUR/USD pair has been showing a strong downtrend for eight consecutive weeks. In mid-August, the price reached a yearly high at 1.1276, afterwards it reversed. Since then, weekly candles on the 1W timeframe have consistently closed in negative territory. Regular and sizable corrective pullbacks enable bears to open short positions at more favorable prices. Over the course of eight weeks, the pair has dropped by more than 550 pips, recently testing the boundaries of the 1.06 level.
The upcoming week is quite important for EUR/USD traders. The US dollar will be influenced by inflation data, particularly the Consumer Price Index report, while the euro will be affected by the outcome of the European Central Bank meeting. If these events "resonate" (inflation remains in the green zone, and the ECB maintains the status quo, voicing a dovish stance), the EUR/USD pair will not only solidify within the 1.06 level but also test the support level at 1.0620 (the lower Bollinger Bands line on the weekly chart). In this case, the 1.05 level will come into view for the first time since December 2022. However, the aforementioned fundamental factors could resonate in the opposite direction (ECB raises rates, articulating hawkish views, and U.S. inflation reports turn red). In this case, we can expect a corrective pullback towards the 1.08 level, possibly aiming for 1.0900.
As we can see, the scales could tip either way. The only certainty at this point is that traders will not have a dull moment in the coming days.
Let's start with the US reports. Throughout the week, data on the Consumer Price Index, Producer Price Index, and Import Price Index will be published. The market's primary focus will be on the first of these releases, which is scheduled for Wednesday, September 13. According to preliminary forecasts, the overall CPI is expected to show an uptrend again, rising to 3.6% YoY. It's worth noting that this indicator had been consistently declining for 12 months, falling from 9.1% in June 2022 to 3.0% in June 2023. However, it unexpectedly accelerated in July, reaching 3.2%. If the August result repeats the July one, it may indicate a certain trend. This would be bad news for the Federal Reserve (especially amid rising oil prices) and good news for the dollar bulls, who would find themselves in a favorable position again. This is especially true if the core CPI also remains in the green zone (according to forecasts, the core CPI should demonstrate a downtrend, dropping to 4.3% YoY).
The PPI, which will be published in the United States on Thursday, is also expected to favor the greenback. In annual terms, the PPI had been declining for a year, dropping from 11.3% in June 2022 to 0.2% in June 2023. It unexpectedly rose to 0.8% in July and is expected to rise even further to 1.2% YoY in August. The core PPI, excluding food and energy prices, is expected to remain at 2.4% in August, just as it did in July and June (prior to which, the core PPI had been declining consistently).
Another inflation indicator, the Import Price Index, will be released on Friday, September 15. While this macroeconomic indicator has secondary importance, it can complement the overall picture, especially if the CPI and PPI are in the green zone. According to forecasts, this gauge is also estimated to show an uptrend in both annual and monthly terms.
As we can see, preliminary forecasts suggest that inflation in the United States will accelerate in August. If the aforementioned releases at least meet the forecasts (let alone if they enter the green zone), the probability of a Fed interest rate hike at the November meeting may increase to 65-70% (currently, the probability is almost 50%, according to the CME FedWatch Tool). This would provide support for the US dollar, even though the probability of a rate hike in September will remain close to zero in any case, even if all inflation reports are in the green zone.
As for the September ECB meeting, the intrigue continues. For example, economists surveyed by Reuters couldn't reach a consensus. According to 39 out of 69 experts, the European Central Bank will leave interest rates unchanged. However, 30 of them believe that the central bank will increase rates by 25 basis points to 4.00%.
Arguments in favor of the hawkish scenario point to high inflation in the eurozone. According to the latest data, the CPI in the eurozone remained at 5.3% YoY, despite expectations of a decline to 5.1%.
Supporters of a wait-and-see position point to concerning signs of economic slowdown in the European region (poor PMI and IFO indices, etc.), as well as the slowing Chinese economy. In their view, the ECB may be forced to maintain the status quo in such conditions.
Despite the conflicting results of the Reuters survey, it's worth noting that the markets are currently pricing in roughly a 65% probability of keeping rates unchanged at the September meeting.
If the ECB does indeed adopt a wait-and-see stance, and U.S. inflation reports are in the green zone, the bears may not only break through the support level at 1.0700 (the lower Bollinger Bands line on the daily chart) but also settle in the 1.06 handle (in such a case, the lower Bollinger Bands line on the weekly chart would serve as support at 1.0620).
Any other scenario combinations would allow bulls to counterattack during downward movements. If inflation disappoints the dollar, and the ECB raises rates, the pair could continue to trade in the 1.07-1.08 range, awaiting the September Fed meeting scheduled for September 19-20.
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