EURUSD Forecast to hit 1.1200

WEEKLY SUMMARY 

Over the last week EUR/USD traded from 1.0912 to 1.1042.At present, the market is experiencing a summer lull due to the absence of significant data unveilings and a substantial number of market participants being away on vacation. In the previous week, the EUR/USD pair once more maintained its position around the 1.10 level, which has become a notable technical focal point. However, there were also occasional data releases that triggered noteworthy fluctuations within the foreign exchange market. Among these, the recent meeting of the Bank of England stands out, where the Bank Rate was increased by an additional 25 basis points to reach 5.25%, aligning with predicted outcomes.In addition to the Bank of England, market participants also directed their attention to the Nonfarm Payrolls report, which once again highlighted the relative robustness and resilience of the US labour market. The inclusion of 187,000 non-farm jobs underscores indications that the economy is undergoing a moderation, although this figure still significantly surpasses the threshold of 100,000, which is in line with population expansion. The unemployment rate experienced a slight decline from 3.6% to 3.5%. While average hourly wages exhibited a 0.4% month-on-month increase, this growth rate is slower compared to the pace observed in 2022. Nevertheless, the annualized basis for wage growth at 4.4% continues to well exceed the level aligned with the 2% inflation target.A news item that generated significant attention in the media, yet garnered minimal response from the currency market, revolved around the USA's transition from an AAA to AA+ credit rating, as pronounced by the rating agency Fitch. Fitch's decision was grounded in concerns regarding the nation's fiscal sustainability, notably highlighted by a debt-to-GDP ratio surpassing 120%. Moreover, the deterioration of the government's regulatory framework also contributed significantly to this downgrade. This pertains to the recurring challenges associated with the US debt ceiling. Among the three prominent rating agencies, Moody's stands alone in retaining the prestigious AAA rating.Unfavourable developments have emerged from China: Contrary to predictions, the nation's exports experienced a substantial year-on-year decline of 14.5% in July, as revealed by data disclosed on Tuesday. This decline is closely tied to the continuing economic deceleration observed in both the US and the EU, which has led to a contraction in the demand for Chinese products.My Short-Term Target for EURUSD is at 1.0940

I see EUR/USD trading in a range of 1.0840 to 1.1280.The immediate outlook remains consistent: Market participants will persist in directing their attention towards upcoming data releases in anticipation of impending interest rate determinations by central banks. The central banks' prudence in awaiting economic and price data over the forthcoming weeks, prior to shaping their monetary policy trajectory, is reasonable. Consequently, it is likely that the market will need to exercise patience until September to witness a definitive departure from the existing trading range spanning 1.08 to 1.12. This awaited shift will hinge upon the data's capacity to furnish clearer insights into the intended strategies of both the ECB and the Fed.From a technical vantage point, the EUR/USD currency pair has entered a brief sideways trend corridor, ranging from 1.0910 to 1.1040, following a downward correction. It is anticipated that the forthcoming week will sustain low volatility, causing EUR/USD to oscillate within this established trading span. In the event of an upward breakout, the subsequent resistance thresholds are identified at 1.1150, marking a two-week peak, and 1.1276, representing a one-year zenith. The lower boundary of this trend channel garners reinforcement from the 100-day moving average, situated at 1.0920. Additional support levels stand at 1.0830, indicative of a monthly low, and 1.0760, marked by the 200-day moving average. Over an extended time horizon, the overarching technical analysis indicates that EUR/USD is poised to ascend beyond ascending average lines, initiating a retest of annual peaks in the aftermath of the summer trading period.My Middle-Term Target for EURUSD is at 1.1000

Central Banks: The recent deceleration in both headline and core inflation, accompanied by a moderation in wage growth denoted by the second quarter's employment cost index, coupled with an uptick in productivity growth, could provide the Federal Reserve with room to abstain from implementing additional interest rate hikes during the September, November, and December FOMC meetings. Overall, despite robust domestic demand and a more tempered labour market contraction, along with persistent inflation within the services sector, it is plausible that the initial rate reduction may be deferred until the latter part of the second quarter in 2024, resulting in a projected target Fed funds rate of 4.50% by the close of 2024. In essence, the US dollar stands to gain whenever market sentiment aligns with the belief that the Federal Reserve intends to maintain higher interest rates for a longer duration than the market's preference.Turning to the European Central Bank (ECB), weakened economic data diminishes the probability of an ECB rate hike occurring in September. Consequently, this would preclude the eurozone from further narrowing the interest rate differential with the United States.

My Long-Term Target for EURUSD is at 1.1200

The EUR displayed a resilient surge to the 1.1200 threshold during the year, only to subsequently retreat beneath 1.0950. My prior projection had indeed outlined this price point for year-end, contingent on the absence of new calamities compelling investors towards the USD. Fortunately, such catastrophic events have yet to materialize, leading to the anticipated consequences. Aiding this trajectory was the more optimistic inflation perspective within the US, a manifestation of the discernible impact of the Fed's interest rate strategy. Nevertheless, it's noteworthy that the Fed instigated its interest rate adjustments notably earlier than the ECB.The repercussions of Europe's interest rate approach are poised to reverberate across all European nations during the third and fourth quarters. This timing aligns with the context of inflation figures falling below the ECB's targeted range in certain countries like Spain. Consequently, there exists a credible likelihood that the ECB will progressively lower its interest rate stance, thereby eroding the EUR's allure in comparison to the USD.

Presently, the conflict in Ukraine has assumed a secondary role within the financial landscape. Markets are presently engrossed in monitoring the trajectory of interest rates within their respective regions. Nevertheless, should a near-term resolution to the conflict materialize, it is likely to elicit a notably positive impact on Europe. Primarily, this cessation of hostilities would alleviate the food supply predicament that has been intertwined with the conflict. Subsequently, the reconstruction efforts in Ukraine could be construed as a significant boon for Europe, effectively acting as an economic stimulus package for the European Union.Intriguingly, this development would instigate an examination of the European Central Bank's (ECB) interest rate policies. Elevated interest rates might potentially increase the cost of reconstruction. Across the Atlantic, the upcoming US presidential elections in November 2024 are already casting their influence. Traditionally, the Federal Reserve (Fed) endeavors to avoid generating headlines or excessive public attention during this period. It can be surmised that the Fed is likely to adopt a more expansionary monetary stance, a shift that could, in turn, advocate for a weakened US dollar in favor of a "risk-on" sentiment.

Following the eurozone's consecutive 0.1% quarter-on-quarter contractions in both Q1 2023 and Q4 2022, economists now anticipate a modest GDP growth of +0.3% for the entirety of 2023. On the US front, economists have officially adjusted their outlook to envision a soft landing and averted any prospect of a "mini" recession. Conversely, the projection for Germany portends negative growth, amounting to -0.3%. My inflation forecasts for 2023 remain skewed towards the downside, with an anticipated decline of 5.4% for the euro area, 6.0% for Germany, and 4.0% for the USA.The general economic landscape has notably ameliorated, although it is important to acknowledge persistent geopolitical risks. Factors such as the ongoing tensions between China and the US concerning Taiwan underscore the potential for these uncertainties to resurface at any juncture. During such periods of uncertainty, investors often gravitate towards safe havens, with the US dollar being a prime example. Furthermore, in conjunction with prolonged higher interest rates, it is reasonable to entertain reservations regarding a substantial weakening of the US dollar beyond the 1.1200 threshold by year-end.

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