Weekly EUR/USD Review: Dollar Comes Back Via “Temporary” Inflation

When the US Federal Reserve delivered its latest fiscal decision early in November, Powell stated that present inflationary pressures are “infuriating.” The US CPI touched a 31-year high of 6.2% YoY in October, fueled by rising energy and food costs. The newest US Commerce Department statistics revealed that the Gross Domestic Product rose by 2% annually in Q3.

Substantial COVID-related stimulus, distribution network constraints, and staff shortages all contributed to the economic disruption. Higher prices and slower growth are global trends. In China, Q3 GDP was 4.9%, while manufacturing inflation hit its highest level in 26 years.

Unbalanced Financial Authorities 

The US currency rose to new 2021 highs versus the Euro, with EUR/USD presently moving at 1.1440. The Dollar gained from a weakening market amid rising expectations that the US Federal Reserve will raise rates twice in 2022. Across the pond, the European Central Bank pledges to maintain economic packages for as long as necessary.

The monetary authorities of most economies also keep stressing that the current inflation surges are likely to be “fleeting.” At his recent news conference, Powell remarked that supply constraint impacts were higher than expected and that rising inflation would continue next year. Others did not provide a timeline, while ECB Head Christine Lagarde said it was “unlikely” they would hike rates in 2022.

Market players are uncertain about when and where policymakers will be concerned about inflation. Monetary authorities appear to be behind the curve and unable to forecast monetary policy in time. Risk aversion follows, boosting demand for high-yielding investments like the Dollar, primed to gain.

Evidence Of Investors’ Gloom

Global economic data reflected this. The German ZEW poll revealed an improvement in economic sentiment in November but a decline in the current situation. Global inflation was confirmed at 4.6% in Oct, while the Wholesale Price Indicator rose to 15.2%.

Lastly, the November University of Michigan Consumer Confidence Index fell to 66.8 from 71.7 in October, its biggest drop since November 2011. This is because consumers believe that no viable solutions have yet been created to limit the damage from inflationary pressures, said Richard Curtin, head economist at Surveys of Consumers.

The second publication of the EU Gross Domestic Product for Q3 is expected to remain unchanged at 2.2%, and the US October Retail Sales are both slated for Tuesday. Inflation data for October will be released alongside US weekly unemployment claims data on Thursday.

EUR/USD Technical Forecast

EUR/USD CHART Source: Tradingview.com

In July 2020, the EUR/USD reached lows not seen since. The weekly chart shows a strengthening negative potential. After a month of circling the 200 SMA, the pair broke below it and accelerated south. A stronger 20 SMA above the lengthier ones reflects higher selling interest. At the same time, chart patterns remain bearish with varying strengths, pointing to another step lower.

The daily chart implies a corrective advance. The momentum signal has risen slightly, but the RSI has weakened and stabilized near 34. Nonetheless, the bearish trend continues, as all moving averages stay well above their current levels.

A breach below the 1.1400 level is likely to result in a test of the 1.1330 price zone. Long-term static support is revealed by another bearish extension. A corrected advance may reach 1.1520 first, then 1.1610. Sellers will likely defend it.