EUR/USD forecast: All eyes on US inflation

• EUR/USD forecast in neutral amid cautious market optimism ahead of US CPI
• Euro steady with ZEW, industrial production beating, but faces headwinds from tariff escalation
• US inflation data likely to set the tone for the greenback’s next move

 

The euro continues to consolidate just beneath the 1.17 mark against the dollar, having managed a modest rebound in tandem with other major currencies so far into Tuesday’s session. We have had some better-than-expected Eurozone industrial production and German ZEW sentiment data also helping the single currency. But ahead of what could be a market-moving CPI print from across the Atlantic, take nothing for granted. This could be the calm before the potential storm. The US dollar could come back strongly if inflation turns out to be already hotter than expected, with higher tariff rates set to exacerbate price pressures in the coming months. That could cause the EUR/USD forecast to turn a bit more bearish, especially given that the ECB are themselves seen cutting rates further and preparing for negative impact of tariffs – in case of a no-deal.

 

Tariff tremors threaten the euro’s swagger

 

This morning saw the German ZEW survey come in at 52.7 compared to 50.8 expected and 47.5 last, thus pointing to a decent improvement in investor sentiment. We also had a 1.7% month-on-month rise in industrial production, which was higher than expected. While these figures suggest the euro remains one of the sturdier performers on the FX stage, tariff clouds are gathering. The EU has its finger poised on the retaliatory tariff trigger, eyeing US goods such as aircraft and alcohol, should trade negotiations collapse or there are no deals in place by August 1. The Wall Street Journal reports this potential escalation, while Reuters suggests the ECB is preparing to stress-test more negative economic scenarios at next week’s policy meeting — no doubt spurred on by the unpredictability of Donald Trump’s tariff tactics.

 

A whiff of optimism leaves the dollar on the back foot

 

Despite the looming spectre of higher tariffs, markets have begun the week with a whimper rather than a bang. The dollar, for its part, has quietly handed back some of last week’s gains as risk appetite makes a cautious return. China’s Q2 GDP managed to surprise on the upside — only just — while chipmaker Nvidia expressed cautious optimism about exporting its H20 chips to China once again. That hint of a US-China thaw was enough to push equities higher, with futures on the Nasdaq 100 and S&P 500 continuing their climb into unchartered territories. Meanwhile, the second-quarter earnings season kicks off Stateside, with JP Morgan, Citi, and Wells Fargo all expected to show that solid trading revenues can paper over cracks in investment banking. But for FX it is not earning, it’s inflation data that could steal the limelight.

 

EUR/USD forecast: US inflation is today’s main event

 

All attention now turns to June’s CPI data out of the US. With the market braced for a 0.3% month-on-month rise, any deviation either way could send the dollar swinging. The Fed’s rate curve still has around 15-16 basis points of easing priced in for September, though one suspects that may prove overly generous — particularly if tariffs begin to filter through more decisively into consumer prices.

 

Economists are bracing for a tariff-induced inflation uptick, and today’s numbers will test that theory. The US CPI has repeatedly surprised to the downside over the last four months, but forecasters are once again circling tariff-exposed categories such as furniture, toys, recreational goods, and vehicles.

 

There’s a growing consensus within the Federal Reserve and the wider forecasting community that inflation may well reaccelerate through the summer. Many businesses initially cushioned consumers from rising input costs by running down inventories or absorbing the pain via shrinking margins. But that buffer is wearing thin. If firms are indeed reaching the end of their rope, consumers — and by extension, the dollar — are likely to feel it soon.

 

Technical EUR/USD forecast: Key levels to watch

 

Source: TradingView.com

 

The bullish trend line going back to the first quarter still remains intact and this has again provided support to the EUR/USD chart today around the 1.1660 area. Key support below this zone comes in around the shaded blue area of between 1.1570ish to 1.1630ish. This area was resistance in April and in mid-June, before rates broke higher later that month. From a technical point of view, the EUR/USD forecast will turn negative if rates were to go below this area in the coming days. In terms of resistance, 1.1700 and 1.1750 area the next key hurdles. Above these levels, the bulls will aim to reach a new 2025 high above 1.1830.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R