EUR/USD Outlook: Weak growth and inflation weigh on the euro

• Manufacturing activity in the euro zone fell at its fastest pace this year in September.

• Eurozone inflation fell below 2% in September, weighing on the euro.

• Market participants see an 85% chance that the ECB will cut rates in October.

The EUR/USD outlook shows a free fall in the euro after a series of subdued trade activity and euro zone inflation figures. At the same time, the dollar was on top after Powell’s speech dimmed the prospect of another super-sized rate cut in November.

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Eurozone data on Tuesday showed that manufacturing activity fell at the fastest pace this year in September, pointing to a drop in demand. Eurozone manufacturing PMI fell to 45.0, well below the 50 mark that separates expansion from contraction. Weaker economic activity is putting pressure on the European Central Bank to reduce borrowing costs.

A separate report showed that inflation in the bloc fell below 2% in September, weighing on the euro. CPI fell from 2.2% in August to 1.8%, falling short of forecasts for a 1.9% increase. In addition, services inflation eased slightly from 4.1% to 4.0%.

Lower inflation gave policymakers confidence to cut borrowing costs in June and September. In addition, market participants are pricing in an 85% chance that the ECB will cut rates in October.

On the other hand, the Fed implemented its first rate cut in September. The 50 bps cut raised the stakes for another such move in November. However, on Monday, Fed Chairman Powell dismissed those expectations. He said the central bank would likely implement quarter-point cuts next. As a result, the odds of a 50 bps cut in November fell from 53.3% to 35.4%.

Key EUR/USD events today

• ISM Manufacturing PMI
• JOLTS job offers

EUR/USD Technical Outlook: Bears take control after RSI divergence

Technically, the EUR/USD price has broken out of its bullish channel with bears leading the way. Moreover, the price is on the verge of making a new low below the 1.1100 support level. The price is trading well below the SMA with the RSI in the oversold region.

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RSI initially made a bearish divergence when EUR/USD broke the 1.1200 resistance. The divergence was a clear signal that the bulls were exhausted and occurred when the price fell below the support of its channel. Given the solid bearish trend, the price is likely to reach the 1.1050 support level soon.

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