EUR/USD Forecast: Euro bears return ahead of inflation data

EUR/USD has gone into a consolidation phase following Tuesday’s rebound.
Once again, dovish ECB commentary capped the euro’s upside.
Eyes on euro area inflation data for September.
The EUR/USD pair has been having a difficult time capitalizing on the dollar weakness as investors are constantly reminded of the European Central Bank’s dovish outlook.

After rising to its highest level in three weeks at 1.1670, the pair ended up closing the day with small gains at 1.1632 and started to edge lower toward 1.1600 on Wednesday as investors shift their focus to inflation figures from the euro area. Market participants expect the Consumer Price Index (CPI) and the Core CPI to stay unchanged at 3.4% and 1.9%, respectively, on a yearly basis in September.

In case CPI readings come in line with, or lower than, analysts’ estimates, the common currency could face renewed bearish pressure as the ECB’s “temporary inflation” narrative would be confirmed.
On Tuesday, European Central Bank (ECB) chief economist Philip Lane pushed back against market pricing of ECB rate hikes. “Markets may not have fully absorbed the ECB’s forward guidance,” Lane said and added that it is challenging to reconcile the market rate pricing with forward guidance.

Later in the day, the Federal Reserve will release its Beige Book. The previous publication showed that businesses in several Fed districts anticipated significant hikes in selling prices and if the latest release reaffirms increasing price pressures, US T-bond yields could continue to push higher and provide a boost to the greenback.

Meanwhile, the market mood remains upbeat with Wall Street’s main indexes posting impressive gains on the back of strong third-quarter earnings figures and causes the dollar to lose some interest. Nevertheless, the Fed’s and the ECB’s policy divergence is likely to remain the primary driver of EUR/USD’s movements in the medium-term.

EUR/USD technical analysis
The Fibonacci 38.2% retracement level of the downtrend that started in early September capped EUR/USD’s rebound at 1.1670 on Tuesday. The 200-period SMA on the four-hour chart is also reinforcing this resistance, suggesting that only a daily close above that level could attract buyers and lift the pair toward 1.1700 (psychological level).

On the downside, the initial support is located at 1.1600 (psychological level, 100-period SMA, 50-period SMA) ahead of 1.1560 (static level) and 1.1525 (2021 low).