EUR/USD Weekly Outlook Update The EUR/USD pair ended around 1.1600 for the third straight week, unable to find a clear direction despite major macroeconomic events. The pair continued trading within a narrow 100-pip range for the second straight week amid speculation ahead of the Fed's monetary policy decision, due to be released on Wednesday. The ECB took its usual action and hiked interest rates by 25 bps. As a result, the interest rate on the main refinancing operations, the interest rate on the marginal lending facility, and the deposit facility stood at 2.65%, 2.9% and 2.5%, respectively. The accompanying press statement and President Christine Lagarde's speech were hawkish, although they were in line with investors' expectations. The ECB chief did not venture into the future, reiterating that the central bank is data-dependent and would make decisions meeting by meeting. But Lagarde also added that "expectations for inflation over shorter horizons remain at elevated levels," underscoring the risks associated with rising price pressures against the backdrop of the Middle East conflict. Speaking positively, however, Lagarde pointed out that the short-term growth outlook had improved due to strong consumption and public investment. It is clear that the Middle East conflict – along with the surging prices of Oil – is the dominant market mover. In turn, Crude Oil traded above the $100 mark per barrel before giving up some ground on Friday but ending the week with solid gains. Furthermore, the International Energy Agency (IEA) said the shortage in global oil supplies is likely to worsen this year, with global oil inventories falling by 95 million barrels in August. Furthermore, tensions in the Strait of Hormuz remain, as traffic through this key waterway is still severely limited. This suggests inflation is likely to continue its northward journey and lead to further global monetary tightening, as the Middle East war does not look set to end in the coming days. The USD posted gains on Friday amid the August Consumer Price Index (CPI) data. According to the report, annual inflation, as measured by CPI, remained steady at 3.4% as expected, while year-over-year core inflation fell slightly to 2.4% from 2.5%, also meeting estimates. Monthly CPI rose 0.4% after gaining 0.1% in July. Consistently high inflation, along with the assumption that the ongoing Middle East war will continue to raise energy prices, suggests the Fed will be forced to raise the key interest rate at its meeting in a week. According to the CME FedWatch Tool, the probability of aof a 25 bps hike is 90% after the release of US CPI data, up from 72.4% the previous day. However, once market participants had time to react, EUR/USD returned to trading around 1.1600. The U.S. dollar remained under short-term pressure after the preliminary release of the University of Michigan Consumer Sentiment Index, which fell to 47.8 in September from 51.7 the previous month. Inflation expectations for next year rose to 4.6%, up from 4% in August. In addition to the Fed statement, the economic calendar includes US August Retail Sales. On the other side of the Atlantic, there will be no major data releases this week; however, ECB President Christine Lagarde will be quoted on Monday. The final Eurozone release this week will be the August HICP at 3.3% YoY. It would be unreasonable to assume that news of the ongoing conflict will affect financial markets unless hostilities are suddenly halted. Right now, financial markets assume the war will continue, Oil prices will keep rising, and tighter monetary policy is in demand. The weekly chart shows EUR/USD is neutral to bullish. The currency pair trades above the 20-week SMA of 1.1557 and has seen buying interest near this mark several times in the past couple of sessions. The 100-week and 200-week SMAs at 1.1343 and 1.1082, respectively, are significantly below the current market price. Technically, oscillators are trading near the middle lines. On the upside, resistance will be found at 1.1628 at the 20-day SMA, with the 200-day SMA at 1.1634 adding strength to the small resistance area, which bulls must surpass to rekindle optimism. A break above weekly highs at 1.1569 will pave the way for a higher move up to 1.1700. On the downside, resistance will come at 1.1557 at the 20-week SMA, where any close below would open a long-term support area at 1.1470. A further fall would test 1.1400.
