Title: EUR/USD Weekly Forecast: As Unimpressive U.S. Data Sparks Doubts, Eyes Turn to Fed’s Next Move
By: FXStreet (original article by Valeria Bednarik)
The EUR/USD pair edged higher over the past week, driven by weak U.S. economic data that cast doubt on the Federal Reserve’s resolve to maintain high interest rates. Though the euro remains under longer-term selling pressure, the latest developments have given bulls a reason for short-term optimism. Lingering uncertainty over Fed policy, lackluster U.S. macroeconomic indicators, and a quiet European calendar have all contributed to recent volatility.
This weekly forecast breaks down all the key market dynamics shaping the EUR/USD pair, focusing on macroeconomic events, central bank policy divergence, technical analysis, and investor sentiment. It also looks at how recent data, especially from the U.S., may shape the Federal Reserve’s next move—vital context as the end of the year nears.
Key Takeaways From the Previous Week
EUR/USD gained modestly, supported by disappointing U.S. data:
– A combination of weak U.S. inflation indicators, slower job growth, and disappointing retail sales data pushed the dollar lower.
– EUR/USD opened the week under pressure but recovered strongly after U.S. retail sales missed expectations. The pair reached as high as 1.0915 before consolidating around that level.
– European macroeconomic releases remained sparse, leaving the euro’s trajectory largely at the mercy of American data and overall risk sentiment.
Unimpressive U.S. Economic Data Undermines the Dollar
Recent macroeconomic results in the U.S. came in worse than expected, prompting investors to adjust their expectations for future interest rate hikes from the Federal Reserve. The cumulative effect of weaker data has been to dampen expectations for further monetary tightening.
Key U.S. economic releases undermining USD strength:
– October’s Retail Sales: U.S. retail sales declined by 0.1% month-over-month, versus a projected fall of just 0.3%. Although slightly better than the worst-case scenario, the headline figure confirmed a slowing consumption trend.
– Core Retail Sales (excluding automobiles): Showed flat growth, emphasizing softness in underlying demand.
– Industrial Production: Fell by 0.6% in October, worse than the anticipated -0.3%, reinforcing concerns about deceleration in economic activity.
– Weekly Jobless Claims: The most recent report showed an uptick to 231,000 initial claims—the highest level in three months—suggesting a cooling labor market.
Collectively, these data points reinforced market speculation that the Federal Reserve may be done tightening and might pivot toward rate cuts sooner than initially expected in 2024.
Federal Reserve: Assessing the Path Forward
Despite the recent economic weakness, U.S. Federal Reserve officials have maintained a cautious tone. Several policymakers have stated that while progress is being made in bringing inflation nearer to the 2% target, there remains a need to keep rates elevated to ensure durable price stability.
What the Fed has said recently:
– Chair Jerome Powell expressed that inflation remains too high, even as market participants interpret recent data to mean otherwise.
– Some Fed officials, like Mary Daly and Loretta Mester, have welcomed recent disinflation trends but emphasized that the battle is far from over, and that additional rate hikes remain possible if conditions shift.
Fed Funds Futures now suggest the following:
– No rate hike is expected in December.
– Odds of a rate cut have increased for mid-2024, with markets currently pricing in at least two 25-bps cuts next year.
With no clear commitment from the Fed on its forward policy path, markets are left weighing data on a week-by-week basis, leading to frequent shifts in risk sentiment and FX volatility.
European Central Bank: Patience Amid Signs of Stabilization
In contrast to the evolving picture in the U.S., the European Central Bank (ECB) remains broadly cautious. Although Euro
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