We have been bearish in previous articles of EUR/USD and remain bearish – we expect far more downside for the reasons below:
Euro Zone Inflation Outlook
Over in the EU: Annual inflation rate in the Euro Area slowed for a third consecutive month to 5.3% in July 2023 from 5.5% in June, in line with market forecasts, preliminary estimates showed. It is the lowest reading since January 2022.
On the other hand, services inflation continued to move higher to 5.6% from 5.4%. the core inflation rate was unchanged at 5.5%, compared to forecasts of 5.4%. Compared to June, the CPI in the Euro Area fell 0.1%.
ECB Interest Rate Outlook
The easing of inflation is enough for the ECB to remain on hold with interest rates going forward as TS Lombard note That the ECB hiking cycle is probably over.
“Lagarde highlighted a change in policy language, with a shift suggesting satisfaction with current rate levels if data trends remain consistent. She refrained from repeating the ECB's previous stance that there's "more ground to cover," suggesting future actions will be data-dependent. Lagarde noted the impact of monetary policy on the real economy, recognizing that tighter financing conditions are influencing investment and real activity, including a slowing services sector. According to Bloomberg sources, ECB officials now view inflation risks as "balanced" while growth risks are seen as tilting to the downside.” (T S Lombard)
Eurozone Growth v US Growth
Growth is falling In terms of Eurozone GDP, it expanded by 0.3% higher than the 0.2% expected by analysts. Growth is low and will fall further as interest rates bite growth in terms of inflation it's slowing enough to allow the ECB to hold and at their meeting last week, they showed no enthusiasm to raise rates. If we look at the eurozone GDP it's well below the US and the USD has a yield advantage...
Gross domestic product increased at a 2.4% annualized rate last quarter, in the US and the USD has an interest rate yield advantage so we expect the EUR to fall.
Euro Zone Going Into Recession
The charts below show clearly the slow up in eurozone. Economic data is coming in worse than forecast and money supply has collapsed which points to PMI's following.
Interest rate Perceptions Favor Lower EUR/USD
As we can see on the COT Net Traders Positions speculators are heavily long the EUR which points to limited upside and major downside.
The major levels of support and resistance to watch in terms of EUR/USD to watch in our view are outlined on the chart below.