EUR/USD 5-day Forecast: Space for Gains

• EURUSD short-term technicals positive
• But be wary of the USD trend rebooting
• US PPI inflation release in focus Wednesday
• As is the release of Fed minutes
• Thursday's CPI inflation release is highlight of the week

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The Euro to Dollar exchange rate (EURUSD) has fallen for 12 weeks in succession now thanks to a well-entrenched downtrend, but recent technical developments hint this could be the week the losing streak is broken, particularly if U.S. inflation data comes in on the softer side of expectations.

While EURUSD is clearly under pressure there were some supportive signals in the latter half of last week with the daily chart showing the recovery from the low at 1.0448 potentially marking a short-term turning point.

Shaun Osborne, Chief FX Strategist at Scotiabank, says short-term technicals are bullish after the EURUSD developed a "morning star" reversal pattern through mid-week.

The positive technical signal was confirmed by steady gains through the latter part of last week and Friday's recovery from a knee-jerk fall that came in the wake of another strong U.S. jobs report.

However, given the Euro-Dollar remains pressured on a multi-week basis, "there is clearly a lot of work ahead for the EUR to build on this development," says Osborne.

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It must be stressed that the bullish setup here is strictly short-term in nature and covers a timeframe of hours to a few days. The overall picture remains one of weakness owing to the strength of the U.S. Dollar advance.

The Dollar has rallied amidst a surge in long-dated U.S. yields and weak market sentiment all linked to a view the Federal Reserve will be required to keep interest rates at elevated levels for an extended period.

This trade can switch back on anytime and any bullish case for EURUSD must be viewed as being a counter-trend profit-taking event that is required to rebalance the market from previously overextended positions.

"While we believe that the bulk of the upward adjustment for US yields and the USD has already taken pace now, it is not clear that a peak is yet in place," says Derek Halpenny, Head of Research for Global Markets at MUFG.

The data calendar is unusually sparse in the Eurozone this week but we will be keeping an eye on some European Central Bank speakers (ECB) who could rouse some interest.

The U.S., on the other hand, is more interesting with Wednesday seeing the release of Producer Price Index (PPI) inflation figures that should give a view of how price pressures at the country's factories are evolving.

This is an important figure as price changes here tend to lead to developments in the more important Consumer Price Index (CPI) measure of inflation further down the line.

Above: "Government bond yields at multi-year highs" - Lloyds Bank.

Wednesday also sees the release of the minutes to the Fed's September policy meeting, which could further shape expectations around the prospect of a November interest rate hike, although we would be surprised if they had a notable impact on the market.

The market will want to see a below-consensus figure to confirm U.S. price pressures continue to ease, despite the robust economy.

The market currently expects a reading of 0.4% month-on-month for September, which is down from August's 0.7%.

A beat of expectations would bolster the 'higher for longer' expectation for U.S. interest rate settings, which is ultimately a key source of support for the Dollar at the present time.

Above: "U.S. headline CPI dragged in both directions" - Lloyds Bank.

Thursday contains the week's highlight in the form of the CPI inflation release for September. The exact same themes relevant to Wednesday's PPI release apply here, except the market impact should be a number of degrees larger.

Headline CPI inflation is expected to have fallen from 0.6% month-on-month in August to 0.3% in September.

Such a development is consistent with the downtrend in U.S. inflation which will mean the Fed is close to ending its rate hiking cycle, give or take an additional 25bp hike in November.

As always, the market-moving impact would come from a surprise to the upside (+USD) or downside (-USD).