EUR/USD forecast: Iran optimism fades as key US data awaited

The US dollar rebounded this morning and that caused the EUR/USD and the price of gold and silver to ease back from their earlier highs following yesterday’s big precious metals rally. The greenback lost ground yesterday after reports suggested Washington and Tehran were edging closer to an agreement that could ease tensions in the Middle East and help stabilise energy markets. The prospect of lower oil prices reduced concerns over inflation, encouraging investors to trim expectations for further Federal Reserve tightening, while favouring currencies that were undermined by the prior energy spike, such as the euro. However, as the anticipated announcement has so far failed to materialise, the dollar has recovered part of its losses, with investors becoming increasingly reluctant to chase risk ahead of key US data in the days ahead. The EUR/USD forecast remains cautious for now.

 

Iran deal or no deal?

 

Markets embraced the prospect of a breakthrough in US-Iran negotiations, with expectations that any agreement could lead to the reopening of the strait of Hormuz and reduce the risk premium embedded in crude oil prices.

 

That encouraged flows into equities and precious metals while weighing on the greenback, as easing energy prices would lessen inflationary pressures and potentially reduce the need for the Federal Reserve to maintain restrictive policy for longer.

 

Yet again though, that enthusiasm has faded as the expected confirmation has so far failed to arrive. While negotiations may be progressing, traders are now demanding concrete developments rather than reacting solely to headlines. For now, the possibility of a deal continues to provide a supportive backdrop for broader risk sentiment, but it wouldn’t take much for markets to falter.

 

This keeps the near-term EUR/USD forecast highly uncertain. If oil prices were to spike again, then surely the currency pair will fall alongside risk.

 

Payrolls and inflation now take centre stage

 

Meanwhile, attention will be shifting towards US economic data, with Friday’s non-farm payrolls report representing the next major test for financial markets, followed by CPI next week.

 

This week’s pre-NFP indicators have painted a mixed-to-weak picture. Private-sector hiring has cooled, while the employment component within the latest ISM services survey suggested labour market conditions may be softening. Today’s release of weekly unemployment data showed jobless claims rose by 199K vs. 203K eyed.

 

Policymakers from the Federal Reserve have repeatedly stressed that future decisions remain data dependent, meaning one report is unlikely to alter expectations dramatically unless it delivers a significant surprise.
 

Markets currently remain relatively steady in their expectations for Fed policy over the coming months, despite the sharp decline in oil prices this week. That highlights how investors are placing greater emphasis on labour market data and inflation than on short-term swings in commodity prices.

 

Looking beyond payrolls, next week’s CPI report is likely to prove even more influential. A stronger-than-expected inflation reading would reinforce expectations that the Fed may need to keep interest rates elevated for longer, supporting the dollar. Conversely, another soft inflation print could place renewed pressure on the US currency. As you may recall, the June report showed a bigger than expected decline in headline CPI to 3.5% compared a prior reading of 4.2%, while core CPI was also softer at 2.6% compared to both expectations and the prior reading (2.9%).

 

Technical EUR/USD forecast and levels to watch

 

 

The EUR/USD has held above the 1.1500 handle this week, keeping the near-term technical bias to the upside. It is not trying to break its bearish trend line, and a big bad of resistance between 1.1560 to 1.1620ish. Without a collapse in oil prices, or significantly weaker US data, the balance of risks remain tilted to the downside for the EUR/USD forecast from here, given that markets have priced in a deal already. Technically, a break below 1.1500 support could see the pair head down to low 1.14s again, the base of the recent breakout.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R