EUR/USD, GBP/USD Forecast: Two Trades to Watch

EUR/USD rises but is set to fall across the week

• German inflation cooled to 6.1% YoY in August, from 6.2%.
• ECB rate decision next week is not clear cut
• EUR/USD trades in a falling channel a test of 1.0685 could expose 1.05 support

The EUR/USD is heading higher, recovering from a three-month low of 1.0685 reached in the previous session. However, the pair is still set for a weekly loss, which will mark its eighth straight week of declines.

The euro has come under pressure as data from the Eurozone has highlighted the deteriorating economic backdrop.

Today, German, inflation data confirmed a modest cooling to 6.1% YoY in August, down from 6.2% in July. The data comes as investors questioned whether the ECB will hike rates again next week.

While inflation remains high at over 2.5 times the ECB’s target level, concerns of a recession in the second half of the year are also rising.

Data yesterday showed that German industrial production fell by more than expected, and the Eurozone GDP was revised lower to just 0.1% QoQ. These figures came after PMI data earlier in the week, which showed that Eurozone business activity contracted by more than expected, painting a worrisome growth picture for the region.

Attention will now turn to the ECB rate decision next week, which is far from clear cut. With economic activity deteriorating and inflation easing, investors are betting that the ECB could pause rate hikes after nine straight rises but leave the door open for further moves.

Meanwhile, the US dollar is heading lower in a profit-taking move after eight straight days of gains. Recent data from US has highlighted the resilience of the economy, fueling bets that the Federal Reserve could raise interest rates again before the end of the year.

Looking ahead, the US economic calendar is quiet; attention will be on Fed speaker Michael Barr as investors watch for more clues over the Fed's potential path for interest rate hikes.

EUR/USD forecast -technical analysis

EUR/USD trades in a falling channel. The pair has broken below the 200 sma and the 20 sma is crossing below the 200 sma in a bearish signal. This, combined with the RSI below 50 keeps sellers hopeful of further downside.

Sellers will look to take out 1.0685 the September low, to expose support at 1.0630 the May low. Below here 1.05 the March low comes into play.

A recovery in the price could see buyers aim for 1.08 the weekly high ahead of 1.0825 the 200 sma.

GBP/USD rises but remains below 1.25

• BoE Andrew Bailey’s comments weigh on sterling
• USD eases on profit-taking taking but strong data supports the greenback
• GBP/USD trades in a falling channel, approaching the 200 sma

GBP/USD has recovered from the 3- 3-month low of 1.2445 reached yesterday but remains depressed below the 12 5 levels. The pair is on track to lose 0.8% across the week and is already down 1.5% across September alone.

While the UK economic calendar has been relatively quiet this week, comments by Bank of England governor Andrew Bailey when he testified before the Treasury Select Committee have weighed on the pound, while robust U.S. data has provided support for the US dollar.

Andrew Bailey said that the central bank is approaching the end of its policy tightening phase. However, he did caution that borrowing costs could still rise should inflation remain persistently high. The market latched on to the idea that the UK economy was near peak rates, causing a sell-off across the week.

His comments came after PMI data at the start of the week showed that the UK economy experienced the steepest decline in business activity in seven months.

This is in sharp contrast to the US, where the ISM services PMI unexpectedly jumped with both prices paid and new orders growing strongly. Yesterday, jobless claims data also fell to the lowest level since February, highlighting the resilience of the U.S. jobs market.

Whilst the UK could be heading to the end of its interest rate hiking cycle, the market is considering that the Federal Reserve may raise interest rates again in November should the strength in the US economy persist.

GBP/USD forecast – technical analysis

GBP/USD continues to trade in a falling channel dating back to mid-July. The RSI supports further losses while it remains out of oversold territory.

Sellers will look to break below 1.2445, the 3-month low, to test the 200 sma at 1.2425. A break below here opens the door to 1.23, the May low.

On the upside, should the 200 sma hold a rise towards 1.2645 the confluence of the falling trendline resistance, the 100 sma, and the weekly high.