EUR/USD Forecast: More signs of continued Federal Reserve’s tightening


EUR/USD Current Price: 1.0693

  • The ECB Economic Bulletin foresees weakening economic activity at the turn of the year.
  • The US Producer Price Index rose at a faster-than-anticipated pace in January.
  • EUR/USD bounced alongside equities, but sellers maintain the downward pressure.

The EUR/USD pair fell to 1.0654, surpassing its previous weekly low by 1 pip, as the US Dollar continued to strengthen on the back of speculation the United States Federal Reserve will maintain the pace of tightening longer than previously anticipated. The Greenback partially lost its bullish momentum as US indexes bounced from their early lows but holds on to gains against most major rivals ahead of the daily close.

The European Central Bank (ECB) released the Economic Bulletin, with updates on the economic, financial and monetary developments in the Euro Area. The document showed that the Governing Council saw weakening global economic activity at the turn of the year, following robust growth in the third quarter of 2022. It also noted that “future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.”

Multiple US figures provided fresh impetus to the Greenback ahead of Wall Street’s opening. On the one hand, Housing Starts fell by 4.5% MoM in January, while Building Permits in the same period advanced a modest 0.1%, both missing the market expectations. On the other, Initial Jobless Claims improved to 194K in the week ended February 10, while the Producer Price Index (PPI) for final demand rose 6% YoY in January, down from 6.5% in December but missing the 5.4% anticipated by financial markets.

 In between, Federal Reserve Loretta Mester, President of Bank of Cleveland’s Fed, hit the wires with some hawkish headlines. She noted that the upside risks to inflation remain in place, adding that the return to price stability will be painful. She then stated that how far the Fed could go above 5% would depend on data and said CPI data showed there’s still more to do on cooling inflation, which remains too high. Finally, she said that, during the most recent FOMC meeting, there was a compelling case for a 50 basis point increase.

On Friday, Germany will publish the January Producer Price Index, while the EU will unveil the December Current Account. The United States will not release relevant macroeconomic figures before the weekly close.

EUR/USD short-term technical outlook

From a technical point of view, the risk of a bearish extension increased. The daily chart shows that the pair remains below  1.0745, the 61.8% retracement of the 2022 yearly slump. At the same time, a mildly bearish 20 Simple Moving Average (SMA) gains downward traction above the current level, while technical indicators hold directionless within negative levels. Finally, the 100 SMA keeps marking north after crossing above the 200 SMA, but both stand well below the current level.

Technical readings in the 4-hour chart favor a downward extension. The pair is meeting intraday sellers around a flat 20 SMA, while the longer ones remain above the latter. The Momentum indicator gains bearish strength below its midline, while the RSI indicator hovers around 43, favoring another leg south without confirming it. As long as below the aforementioned 1.0745 level, chances are of a test of 1.0515, the 50% retracement of the 2022 decline.

Support levels: 1.0655 1.0620  1.0570

Resistance levels: 1.0745 1.0790 1.0830

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