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Euro Outlook Bleak Amid Rising Inflation

By InstaForex GroupForexOct 06, 2021 10:08AM ET
www.investing.com/analysis/euro-outlook-bleak-amid-rising-inflation-200604186
Euro Outlook Bleak Amid Rising Inflation
By InstaForex Group   |  Oct 06, 2021 10:08AM ET
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The euro resumed its decline after macroeconomic data from the EU came out slightly above expectations.

Thus, the services sector's business activity index (PMI) dropped from 59.0 to 56.4, while analysts predicted a decline to 56.3.

The composite index, which was expected to fall from 59.0 to 56.1, eased to just 56.2. Although the difference is minor, it is still better than expected. On the other hand, the Producer Price Index was projected to rise from 12.4% to 13.7%, but instead, it increased to only 13.4%.

This data was negative for the euro as it indicated either a slowdown in the business activity or rising inflation. So, the euro was only supported by the fact that markets had expected to see weaker indicators.

European Production Price Index data chart.
European Production Price Index data chart.

It is worth focusing primarily on the PPI data as the PMI did not seem to be of great interest to investors yesterday. Otherwise, markets would have reacted to its release in the US, especially when the data was better than expected.

The Services PMI decreased to 54.9 while the forecast had predicted it to decline from 55.1 to 54.4. The figures came in much better than in Europe, but markets showed no reaction to this. Investors are more concerned about inflation in the EU.

US composite PMI data chart.
US composite PMI data chart.

Today, the euro is likely to accelerate its pace of decline amid a drop in the EU retail sales. The indicator decreased from 3.1% to 0.6%. Such a rapid fall in consumer activity, coupled with the continuing rise in inflation, is a quite worrisome sign.

European retail sales data chart.
European retail sales data chart.

The second factor to weigh on the euro may become the employment data in the US. According to analysts, the labor market has added 415,000 new jobs. Amid the current unemployment rate, even 200,000 new jobs would be a positive sign.

So, the estimated jobs data indicates a steady recovery of the US labor market. The unemployment data comes ahead of the official report of the US Department of Labor report.

US jobs report data chart.
US jobs report data chart.

In the course of a correction from the support line of 1.1562, the EUR/USD pair reached 1.1640. At this point, the quote came to a halt and pulled back towards 1.1600. Then, the pair was trading in the flat channel between 1.1590 and 1.1615.

Considering the pair's downward cycle formed in early June, the market sentiment seems to be changing now. This may potentially lead to a change in the medium-term trend.

The RSI technical tool has reached 50 on the 4-hour chart but failed to hold above it. On the daily time frame, the RSI line is still located in the oversold zone.

Outlook

The lack of a full-fledged correction indicates that the bearish trend prevails in the market. This stops the bulls from increasing the volume of long positions on the pair. 

We may assume that market participants may soon approach the support at 1.1562 and attempt to break through it.

Consolidation of the price below 1.1550 will become the primary sell signal for the euro. This will indicate a prolonged downtrend towards the area of 1.1500-1.1420.

EUR/USD technical outlook.
EUR/USD technical outlook.

Euro Outlook Bleak Amid Rising Inflation
 

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Euro Outlook Bleak Amid Rising Inflation

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