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Euro Forecast: EUR/USD Looks Lower Against Inflationary Backdrop

Euro Forecast: EUR/USD Looks Lower Against Inflationary Backdrop

Warren Venketas, Analyst

EUR/USD ANALYSIS

  • Euro recovery may be short-lived.
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EURO OUTLOOK: BEARISH

The Euro has somewhat recovered post-invasion last week but remains under significant pressure from its global market effects. Coordinated sanctions by the “West” have restrained the Russian economy however oil and gas are excluded. For now, alarm bells regarding oil and gas prices are not ringing just yet but omitting such transactions from sanctions may prove harder than initially thought. If any inclination towards oil and gas being curtailed could send energy prices through the roof!

The obvious knock-on effect will be contributing to Europe’s already rallying inflation figures giving less impetus for a hawkish ECB. Barring oil supply fears, the ECB has been relatively dovish to other major central banks and in particular the Federal Reserve. The U.S. has been less squeezed by the war in Ukraine by pure geographical and financial reliance leaving the upside potential for the dollar against the EUR quite significant.

In addition, growth in the Euro zone is likely to be negatively compressed leaving the ECB in a tough position concerning rate hikes – i.e. combat inflation or hamper growth. In summary, the longer the war endures, the worse for the Euro against the greenback. The dollars safe-haven appeal further supports the bearish bias on the EUR/USD pair under the current economic and political backdrop.

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

EUR/USD daily chart

Chart prepared by Warren Venketas, IG

Price action on the daily EUR/USD reflects the recent market volatility finding support just short of the 1.1100 psychological level. Near-term, I forecast a move down to subsequent support levels despite the market hovering close to oversold territory on the RSI.

Resistance levels:

  • 1.1300
  • 1.1222

Support levels:

  • 1.1500
  • 1.1100

IG CLIENT SENTIMENT DATA POINTS TO EURO WEAKNESS

IGCS shows retail traders are currently LONG on EUR/USD, with 64% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term downside bias.

Contact and follow Warren on Twitter: @WVenketas

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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