EUR/USD forecast as US sinks to a recession and EU confidence slips

By:
on Jul 28, 2022
  • The EUR/USD pair dropped sharply after the latest US GDP data.
  • The economy sunk to a recession in the second quarter as inflation rose.
  • Consumer confidence in Europe sunk to an all-time low.

The EUR/USD price dropped sharply on Thursday after economic data from the US showed that the economy sunk to a recession in the second quarter. The pair dropped to a low of 1.0110, which was sharply lower than last week’s high of 1.0276.

US recession arrives 

The US economy sunk to a recession in the second quarter as high inflation hurt consumer spending. Data by the statistics agency showed that the economy contracted by 0.9% in the second quarter after falling by 1.6% in Q1.

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The agency attributed the contraction to the soaring inflation and trade deficit. Data published recently showed that the headline inflation surged to 9.1% in June, the biggest increase in more than four decades. Meanwhile, the closely watched core personal consumption expenditure (PCE) declined from 5.2% to 4.2% in Q2.

The weak US GDP data came a day after the Federal Reserve delivered a giant 0.75% rate hike in a bid to fight inflation. This increase was in line with what analysts were expecting. In a statement, Jerome Powell, who was wrong on inflation, reiterated that the economy was not in a recession. 

The European economy is not doing well either. Data by Destatis showed that the German inflation rose by 7.5% in July while the harmonised rate rose from 8.2% to 8.5%. The two numbers were better than what analysts were expecting. 

Meanwhile, business and consumer confidence declined to record lows in Europe. Data by the European Commission said that consumer confidence crashed to a record low of – 27 from the previous – 23.8. Services and industrial sentiment also declined to 10.7 and 3.5, respectively. Therefore, the European Central Bank will have a tough time tightening in such conditions. 

EUR/USD forecast 

The four-hour chart shows that the EUR/USD price dropped to a low of 1.0110 after the latest US GDP numbers. It remains inside the horizontal channel shown in red and slightly below the 25-day and 50-day moving averages. The Relative Strength Index (RSI) has continued retreating while the price is slightly below the Ichimoku cloud. 

Therefore, I suspect that the EUR/USD sell-off will continue in the near term as sellers target the parity level at 1.0000. A move above the resistance level at 1.0200 will invalidate the bearish view.

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