EUR/USD Weekly Forecast: The Dollar Bulls Have Returned, End the Downturn

The EUR/USD pair advanced throughout the week, but failed spectacularly at parity, finishing the week at around 0.9750, resulting in a slight weekly loss.

At the start of the fourth quarter, optimism reigned supreme, with Wall Street reporting massive gains and government bonds extending their gains from the previous week.

Risk appetite is supporting the EUR/USD.

Market participants expected central banks to slow the pace of quantitative tightening sooner rather than later, given the growing likelihood of a global recession.

The Reserve Bank of Australia raised the cash rate by 25 basis points, which was less than expected, fueling speculation and demand for high-yielding assets.

The good vibes, however, did not last long. The euro began to lose value on Wednesday, as the EU proposed new sanctions against Russia for its February invasion of Ukraine.

Following the illegal annexation of the regions of Donetsk, Luhansk, Kherson, and Zaporizhzhia, sanctions were imposed, which included a price ceiling on Russian oil as well as restrictions on imports and exports from and to the country.

The European Union Is in Danger.

Furthermore, sluggish EU statistics reawakened fears of a European economic downturn, dampening the risk-positive mood. S&P Global lowered its September PMIs, indicating a worsening decline in the business sector.

At the same time, wholesale inflation in the EU rose by 43.3% year on year in August, while retail sales fell by 0.3%, with German sales falling by 1.3%.

Monetary Policy Meeting of the European Central Bank Accounts had an effect on the common currency as well. Some officials, according to the memo, favored a larger rate hike of 50 basis points.

Furthermore, the median three-year inflation forecast remained unchanged at 3%. Policymakers emphasized that while the euro's depreciation may exacerbate inflationary pressures, acting "decisively" now will eliminate the need to hike more aggressively later.

Officials at the United States Federal Reserve are more pessimistic than they have ever been.

Market sentiment deteriorated further as speakers from the United States Federal Reserve hit the airwaves, echoing their well-known hawkish tone.

Minneapolis Fed President Neel Kashkari stated that there is still work to be done on inflation, and that while there is a risk of overshooting, there is no evidence that inflation has peaked.

Charles L. Evans of the Federal Reserve Bank of Chicago and Loretta Mester of the Cleveland Federal Reserve Bank have both stated that inflation is their primary concern.

Finally, Governor Christopher Waller stated that there is no reason for the Fed to slow its policy tightening. Meanwhile, US data has fueled expectations that the Federal Reserve will maintain its aggressive monetary tightening policy.

According to the September Nonfarm Payrolls report, the country added 265K new jobs in September, which was higher than expected but lower than the previous month.

Unemployment fell unexpectedly to 3.5%, but labor-force participation fell to 62.3%, down from 62.4% in August. The announcement came after a string of dismal US employment figures.

On Tuesday, market participants learned that the number of job openings fell dramatically in August, while layoffs and discharges remained above 1.5 million.

Furthermore, according to the Challenger Job Cuts report released on Thursday, US-based firms reported 29,989 layoffs in September, a 46.4% increase from August and a 67.7% increase from the previous year.

Finally, initial jobless claims for the week ending September 30 increased unexpectedly to 219K, exceeding forecasts of 200K. Despite mixed data, the job market appears to be strong enough to withstand rate hikes. Everything boils down to inflation.

The following week will be filled with fewer but more exciting events. The US Federal Reserve will release the Minutes of its most recent meeting on Wednesday, and the government will release the September Consumer Price Index on Thursday.

This year, annual inflation is expected to be 8.1%, slightly higher than the previous year's 8.3%. The expected core reading is 6.5%. If the CPI falls in August, it will have little impact on what the market expects the Fed to do.

Germany will release its September Harmonized Consumer Price Index, which is expected to remain unchanged at 10.9%. Finally, on Friday, the focus will be on US September Retail Sales.