Home Forex Market Analysis EURUSD Forecast: Bearish Flag Forms Ahead of US Inflation Data

EURUSD Forecast: Bearish Flag Forms Ahead of US Inflation Data

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EURUSD Forecast: Bearish Flag Forms Ahead of US Inflation Data

The EURUSD price has formed a bearish flag pattern as investors assess the recent economic data from Europe and the United States (US). The pair is trading at 1.1335, which is about 8% below the last year’s high.

US NFP data

The US economy is doing well even as the spread of the Omicron variant continues. Data published last week by the Bureau of Labor Statistics (BLS) showed that the economy added a net of 199k jobs in December. That happened as the private sector added over 212k jobs while the public sector shed jobs.

While the headline numbers were disappointing, a closer look beneath the surface showed that the labor market is doing well. 

For example, the closely-watched unemployment rate declined to 3.9% in December. That decline was better than the median estimate of 4.1%. It was also significantly lower than its 2020 high of almost 15%. Therefore, if the trend continues, the unemployment rate will end the year being below 3%. 

Wages also did well in December. American companies increased wages by about 0.6% in December as the labor shortages continued. On a year-on-year basis, wages rose by 4.7%, which is significantly strong.

Recent jobs numbers have also been strong. For example, data by the Labor Department showed that the American economy had over 10 million vacancies in December. The great resignation has happened, with over 4 million people quitting their jobs. 

Further, initial jobless claims that soared during the pandemic have also moved below where they were in 2020. 

US inflation data next

The next key data that will move the EURUSD pair will be US inflation data that will come out on Wednesday. Economists expect that consumer and producer prices surged in December as the supply chain disruptions worsened. 

Data compiled by Investing.com shows that analysts expect the data to show that the headline consumer price index (CPI) rose from 6.8% in November to 7.0% in December last year. If analysts are accurate, that will be the highest inflation rate in decades. On a month-on-month basis, the CPI is expected to decline from 0.8% to 0.4%. 

Meanwhile, analysts expect that the core CPI rose from 4.9% in November to 5.4% in December. That will also be the biggest increase in years.

Fed tightening

Therefore, with inflation surging and the unemployment rate falling, there is a likelihood that the Fed will end its quantitative easing policy in March this year. It will then start hiking interest rates in the same period.

Minutes published last week confirmed that the Fed is considering hiking rates at least three times this year. 

Therefore, a case can be made that the EURUSD pair will keep falling because the European Central Bank (ECB) is expected to continue with its scaled-down quantitative easing (QE) program this year. It is expected to hike the interest rate in 2023.

EURUSD forecast

On the daily chart below, we see that the EURUSD pair has been in a narrow range in the past few weeks. As a result, the pair has formed a bearish flag pattern that is shown in green. It is also consolidating between the 25-day and 50-day Moving Averages. The price is also below the important resistance level at 1.1600, which was the lowest level on November 3rd.

Daily EURUSD chart shows bearish flag beside EMAs.

Therefore, there is a likelihood that the EURUSD pair will have a bearish breakout in the coming days. If this happens, the next key support level to watch will be at 1.1200.

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