EUR/USD forecast: Weaker oil gives politically-hit euro mild relief

The EUR/USD recovered from a modestly weaker start after after spending the last two days of last week in tight consolidation following a sizeable drop in response to a hawkish Fed rate hike in mid last week. The pair was held back as a result of Germany’s regional elections at the weekend, which made the nation’s political picture a little messier. But the downside has been limited owing to expectations of another ECB rate hike this year, and, more to the point, due to the fact oil prices have eased further at the start of this week. The near-term EUR/USD forecast remains closely tied to oil prices, which may mean renewed weakness for the pair should energy prices spike again.

 

US data takes a back seat

 

Following the FOMC rate hike last week, this week is going to be a lot quieter on the macro front. With little on the US data calendar to move markets, oil is likely to have an outsized influence on the dollar, and by extension, the EUR/USD forecast this week. Attention will turn to Donald Trump’s meetings with Gulf state representatives, reportedly taking place in New York alongside the UN General Assembly. Crude oil has softened in recent days, but the pullback has yet to alter the bigger picture. US Secretary Scott Bessent has just said that can't say how long the Iran conflict will last, although he also admitted that the US has had talks behind the scene with China regarding Tehran. This has raised hopes of some diplomacy but nothing concrete yet.

 

Eurozone PMIs likely to attract some attention

 

From the eurozone, there are a few ECB speakers this week to look forward to, although it is likely that the manufacturing and services PMI data on Wednesday would be more important. Of course, not as important as the direction of oil prices. But if the PMI data show significant signs of stagflation amid the energy spike, then that could hurt the single currency.

 

Meanwhile Germany’s political picture became a little messier over the weekend. Two regional elections added to the woes of Chancellor Friedrich Merz’s Christian Democratic Union (CDU), with the far-right Alternative for Germany (AfD) winning in Mecklenburg-Vorpommern, where the CDU failed to clear the 5 per cent threshold for state parliament, while the Left Party won in Berlin.

 

Falling support for the CDU and a more fragmented political landscape will not make reforms easier to deliver. For the euro, it is another cloud on the horizon, but not yet one large enough to displace the force that matter most right now: energy prices.

 

Technical EUR/USD forecast and key levels to watch

 

For now, the near-term risks in the EUR/USD forecast remain tilted to the downside as the pair tests key resistance around 1.1500 area – a former support level.

 

 

If the selling pressure resumes here, we could see some follow-up selling towards 1.1405 level, beneath which a retest of the June lows around 1.1325 would start to look increasingly likely. It could get there if oil prices were to spike higher again.

 

But should the EUR/USD break above 1.1500 then 1.1527/30 area is the initial resistance to watch ahead of 1.1555/60 area next and 1.1600 thereafter.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R