EUR/USD Weekly Forecast 26 Aug 19


In the previous EUR/USD weekly forecast, we noted a dip down to the lower bollinger band. We were at a crucial region as previous bearish momentum failed to establish any foothold beyond this region.

Any bullish recovery would require the EUR/USD to rise above 1.11 before heading for a test of the important sentiment and technical region of 1.12.

The German ZEW Economic Sentiment was reported to be much worse than expected. Instead of -27.8, it was reported to be -44.1. The ZEW President Professor Achim Wambach was reported to have mentioned that the information pointed to a significant deterioration in the outlook for the German economy. Geo political challenges such as the US and China trade dispute and the Brexit negotiations probably added to the challenging situation for Germany’s economy. On the other hand, a number of important US economic data was reported to be better than expected.

While the Italian government collapsed last Tuesday with the resignation of the Prime Minster, the EUR/USD was not significantly affected. It would be crucial that we take note of further developments.

The US China trade war intensified with more tit for tat actions.

Technical Analysis

Looking at the EUR/USD weekly chart above, we observed a recovery of the bullish pressure. For now, as mentioned in the previous forecast, the downside momentum of currency pair yet again failed to hold on to the region. Bollinger bands remain a region of influence as it functioned as a support region.

A bearish recovery will need to overcome 1.11 and the lower bollinger band below before heading to 1.1. A continuation of the bullish price action will need to overcome the important sentiment and technical region of 1.12 and the middle bollinger before moving on.

US China Trade War Escalates

China announced plans to increase duties by 5% – 10% on more than 5,000 US products.  A 25% tariff on US car imports will be reactivated too. The new plans will impact around $75 billion of US goods. This comes after a move by the US to add to the tariffs.

Late in the week after the above development, President Trump announced a plan to increase the tariff on around $250 billion of Chinese goods from 25% to 30%. A revision of an upcoming tariff on around $300 billion of Chinese goods was then made, moving the amount from 10% to 15%.

It was also stated that he had asked US companies to look for alternatives beside Chinese goods.

Market Reacts

The US dollar weakened against the Euro towards the end of the week. Many are attributing this to the escalation of the US China trade war as apprehension grew about the US’s economic endurance against a protracted trade spat.

In Jackson Hole, Fed’s Powell commented that the central bank has plans to provide more stimulus if the US economy is affected by the current global environment. Having said so, US President Trump criticized Powell and was reported to have mentioned that he isn’t happy with the Fed chairman. This may have triggered aversion towards the US dollar as investors are wary of political bumps.

The Week Ahead

There are many economic releases due in the coming week. It is likely to be a sentimental week and hence it is crucial to monitor the economic releases and the corresponding market reaction.

EUR German Ifo Business Climate
Business Climate surveys are influential as the sentiment of businesses is a leading indicator of economic health. A healthy sentiment suggests that an economy is moving along well while a cautious sentiment may see less business activities due to prudence.

USA Core Durable Goods Orders
USA Durable Goods Orders
Reports on the orders of goods are leading indicators of production and thus the level of economic activities. Increasing purchase orders suggests that manufacturers will increase activity to meet the demand, providing downstream benefits such as employment. On the other hand, decreasing orders may indicate an upcoming economic crunch.

USA FOMC Member Bullard Speech
Speeches may reveal new insights to economic policies or contain a question and answer segment that at times go into unscripted topics resulting in unexpected developments and volatility.

USA CB Consumer Confidence
Consumer surveys are influential as the sentiment of consumers is a leading indicator of economic health. A healthy sentiment suggests that an economy is moving along well and hence consumers are confident. This likely leads to increased retail sales. A cautious sentiment on the other hand may see consumers spend less in view of a perceived upcoming economic crisis.

USA Richmond Manufacturing Index
This survey of manufacturers is important as the sentiment of businesses is a leading indicator of economic health. A healthy sentiment suggests that an economy is moving along well and with the activities of the businesses, downstream benefits will happen such as employment and investment.

USA Crude Oil Inventories
Movement of oil supply may bring insights to the level of general economic activities. For example, an increasing supply may suggest excessive production or diminishing demand. A reducing supply on the other hand may suggest an economic pick up.

EUR German Preliminary CPI
Consumer Price Index is important because the price of consumer goods is a significant component of inflation. If inflation is high, a central bank may increase interest rate to mitigate the situation. Speculations of a possible interest rate hike may generate demand for the currency.

USA Preliminary GDP
Gross domestic product is a measure of the monetary market value of all the goods and services produced. It is an overall measure of economic activity and health and thus wields influence on the home currency.

EUR CPI Flash Estimate
Consumer Price Index is important because the price of consumer goods is a significant component of inflation. If inflation is high, a central bank may increase interest rate to mitigate the situation. Speculations of a possible interest rate hike may generate demand for the currency.

USA Personal Spending
While Personal Spending is similar to Retail Sales, it focuses on consumers. It is a fundamental component of the economy because as consumers spend, it translates to revenue and flows up stream as salaries, wholesales purchase, production orders and so on.

USA Core PCE Price Index
While the Personal Consumption Expenditures index is similar to Consumer Price Index, it focuses on individuals. It is a component of inflation and if inflation is high, a central bank may increase interest rate to mitigate the situation.

USA Chicago PMI
Purchasing Managers’ Index is a survey of purchasing managers and is important as the sentiment of purchasing managers is a leading indicator of economic health. A healthy sentiment suggests that an economy is moving along well while a cautious sentiment may see less business activities due to prudence.

There are many more events and hence it is important to follow an economic calendar. By doing so, you can reduce the possibility of an unexpected development affecting your trading plan.

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Traders should always practice proper money management and seek to understand the underlying tones for the market.

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