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EUR/USD Outlook: Vulnerable to Further Losses on Muted Inflation

EUR/USD Outlook: Vulnerable to Further Losses on Muted Inflation

Daniel Moss, Analyst


What's on this page

EUR/USD, European Central Bank, Euro-zone Inflation, Covid-19 – Talking Points:

  • Equity markets drifted lower during Asian trade as the lack of progress in US fiscal talks continues to gnaw at market sentiment.
  • Upcoming inflation data could dictate the near-term outlook for the growth-sensitive Euro.
  • EUR/USD poised to extend its decline after failing to break above key resistance.

Asia-Pacific Recap

Equity markets moved lower during the Asia-Pacific trading session, with Australia’s ASX 200 index falling 0.54% and Japan’s Nikkei 225 index sliding 1.4%.

The haven-associated US Dollar and Japanese Yen continued to push higher against their major counterparts, as the prolonged gridlock in US fiscal stimulus negotiations appeared to sour market sentiment.

Gold slipped lower and silver slid over 0.5%, as yields on US 10-year Treasuries nudged marginally lower.

Looking ahead, US retail sales and industrial production numbers for the month of September headline the economic docket alongside inflation data out of the Euro-area.

Upcoming Inflation Data Could Sway ECB

The growth-sensitive Euro has been under fire in recent days, as several European nations move to tighten restrictive measures amid a record surge in coronavirus infections.

This selling may intensify in the coming days should upcoming Euro-area inflation data continue to show sluggish consumer price growth, with headline inflation expected to sink to -0.3% and the core inflation rate to drop to a record low of 0.2%.

Of course, some of the recent weakness in consumer prices can be attributed to the delay in summer sales and marked depreciation in energy prices.

Nevertheless, a notable stagnation in inflation may fuel bets that the European Central Bank will ease its monetary policy settings further.

In fact, several members of the Governing Council have made the case “for keeping a “free hand” in view of the elevated uncertainty, underpinning the need to carefully assess all incoming information, including the euro exchange rate, and to maintain the flexibility in taking appropriate policy action if and when needed”.

Therefore, disappointing headline and core inflation prints may intensify the need for additional support from the ECB and in turn lead to a marked discounting of the Euro against its major counterparts.

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EUR/USD Daily Chart – Head and Shoulders Top Playing Out

EUR/USD daily chart created using TradingView

From a technical perspective, the EUR/USD exchange rate seems poised to extend its retreat from the monthly high (1.1831) after failing to hold above the trend-defining 50-day moving average (1.1727).

The RSI’s dive back below its neutral midpoint, in tandem with the MACD indicator tracking firmly in negative territory, hints at swelling bearish momentum and may ultimately inspire a more extensive downside push, if psychological support at the 1.17 mark.

With that in mind, a daily close back below the August low (1.1696) would probably signal a continuation of the downtrend extending from the yearly high (1.2011) and carve a path to test the March high (1.1495), if sellers can overcome support at the 38.2% Fibonacci (1.1626).

Conversely, a break and close above the 21-DMA (1.1752) could inspire a rebound back towards the October 9 swing-high (1.1831), with a daily close above the 1.1850 mark needed to bring the yearly high (1.2011) into focus.

EUR/USD 4-Hour Chart – Rising Wedge Break Hints at Further Losses

EUR/USD 4-hour chart created using TradingView

Zooming into a 4-hour chart reinforces the bearish outlook depicted on the daily timeframe, as price carves out a Bear Flag pattern above key support at the August low (1.1696).

However, the development of the MACD hints at building bullish momentum as it eyes a cross above it slower signal line counterpart.

That being said, an impulsive push to the downside looks on the cards, with a break back below the 1.17 mark probably validating the bearish continuation pattern and carving a path to test the September low (1.1612).

On the other hand, should psychological support at the 1.17 mark remain intact, a rebound back towards the sentiment-defining 200-MA (1.1756).

EUR/USD IG Client Sentiment

Retail trader data shows 41.56% of traders are net-long with the ratio of traders short to long at 1.41 to 1. The number of traders net-long is 8.50% higher than yesterday and 16.73% higher from last week, while the number of traders net-short is 9.45% lower than yesterday and 13.00% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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