The upcoming week promises to be volatile and informative. The central event will be the September Federal Reserve meeting, whose outcome will overshadow all other fundamentals.
Let's first review the key macroeconomic reports for EUR/USD that will be released in the coming days.
On Monday, the US will publish the New York Empire State Manufacturing Index, based on a survey of New York Fed district manufacturers. After two months of growth, it's expected to fall to 4 points, signaling a fading of the momentum seen in July and August. For dollar bulls, the index must not return to negative territory, especially with the ISM Manufacturing Index (in contraction since March) in the background.
During the European session on Tuesday, the ZEW indices will be released. Last month, these indicators showed negative dynamics, and the trend should persist in September. In particular, German business sentiment is expected to fall to 26.4 points (down from 34.7 in August). The eurozone-wide index should also decline, expected at 20.3 (last month: 25.1). If readings meet forecasts (i.e., aren't much worse), the market may ignore the release. Recall that after the latest European Central Bank meeting, the central bank made it clear it will keep a wait-and-see stance amidst accelerating eurozone inflation, so a slowdown in ZEW is unlikely to soften the ECB's position.
During Tuesday's US session, retail sales data will be released. After growing 0.9% in June, July sales increased only 0.5%. For August, an even smaller +0.2% is expected. If the print is negative, the dollar will come under significant pressure, as this would signal cooling demand. Even the forecasted figure is negative for the greenback, since the downward trend signals consumer caution, rising savings, and/or expense shifting.
On Wednesday, the US will report building permits data. In August, this remained in negative territory at -2.8% y/y, putting pressure on the dollar. Further negative numbers are anticipated for September (down to -3.5%). This is an important housing and macro indicator, so a "red" release will put additional pressure on the dollar, especially if the accompanying new housing starts report, released the same day, is also negative. In August, housing starts are forecast to drop to 1.3%, after a previous 5.2% rise in July.
On Thursday, all eyes will be on the weekly initial jobless claims. Last week, the figure unexpectedly jumped to 263,000 (the highest since April 2023). Forecasts suggest it will drop to 245,000 this week (still very high). If, contrary to forecasts, the figure holds or climbs, the dollar will feel significant pressure, since this would indicate continued, sharp cooling in the US labor market.
The Philadelphia Fed Manufacturing Index, also out Thursday, could add volatility. In August, it fell to -0.3. For September, a mild rise to 1.4 is expected. For dollar bulls, it is important that this indicator at least leaves negative territory.
On Friday, Germany releases the Producer Price Index (PPI)--the most important EUR/USD report of the day. This inflation gauge may supplement the recent German CPI data: German annual CPI accelerated to 2.2% y/y (the highest since July), and the harmonized index rose to 2.1% y/y. PPI is expected to increase by 0.1% m/m. Annually, the index should remain negative but show an upward trend (-0.9% after -1.5%).
However, all these releases will be eclipsed by the main event: the September 16-17 Fed meeting, where the central bank is all but certain to cut the rate by 25 basis points. This scenario is the central case and is already priced in. The main intrigue is the tone of the statement and Jerome Powell's comments. After a weak August non-farm, dovish expectations have risen sharply. For example, the odds of an extra 25-point cut in October now stand at 80% (CME FedWatch), and odds for another 25-point cut in December are at 74%.
In my opinion, these expectations are too high; if the September meeting outcome is "not dovish enough," EUR/USD may come under pressure even despite an actual 25 bp cut. Chair Jerome Powell typically tries to maintain a balanced tone, and it is unlikely he would promise further rate cuts right after delivering one. Such an outcome would likely be negative for EUR/USD bulls, as overblown dovish expectations could backfire, both literally and figuratively.
It's worth noting that the risk of a "hawkish cut" is already weighing on EUR/USD: this is why the pair failed to test the 1.18 handle last week despite supportive fundamentals. Price oscillated between the middle and upper Bollinger Bands on the daily chart (1.1670-1.1760), and will likely remain in this range until the Fed's decision is published. If the Fed does not surprise markets with an ultra-dovish message, EUR/USD could see a retracement toward the 1.16 handle.
Bottom line: all focus on the Fed.
