• EUR/USD forecast remains bearish ahead of US CPI and Chinese GDP data
• Market Sentiment: Strengthening bond yields keeps EUR/USD, stocks under bearish pressure
• Economic Concerns: Weak Eurozone and Chinese growth add to Euro weakness

The EUR/USD has been struggling to find its footing, slipping to a new multi-year low today of just below the 1.0200 handle. The pair remains on a downward trajectory, now eyeing a potential fourth consecutive monthly decline. The bearish momentum has been fuelled by a surging US dollar, which has been supported on the back of stronger labour market data and expectations inflationary pressures will return under Trump. Combined with weak economic data from the Eurozone and China, this is all helping to keep the EUR/USD forecast and trend bearish.

EUR/USD forecast: How high will the dollar rise?

The greenback continues to dominate, supported by rising US bond yields and robust economic data. Investors have been repricing US interest rates higher, driven by persistent inflation concerns and unexpectedly strong labour market data. December’s non-farm payrolls report showed remarkable resilience, with job gains significantly outpacing expectations. While revisions shaved 8,000 jobs off previous months’ totals, the unemployment rate dipped to 4.1% from 4.2%, reinforcing the case for a prolonged pause in Federal Reserve policy shifts. Wage growth, although steady, underscores a resilient labour market, adding to the dollar’s appeal.

As a result, US bond yields have climbed further, with the benchmark 10-year yield nearing its October highs of 5.02%. This upward trajectory in yields continues to attract capital into the US dollar, keeping the EUR/USD forecast under bearish pressure.

Rising yields also hurting risk appetite

Of course, it is not just the euro that the dollar is rising against. Rising bond yields and diminishing hopes for further US rate cuts have given the Dollar Index a solid boost, pushing it higher for the seventh straight week and setting it up for a fourth consecutive monthly gain. On Friday, US 30-year bond yields hit 5%, inching closer to October’s peak of 5.178%, while the 10-year yields aren’t far behind, hovering near 4.80%.

It’s not just the US seeing this trend. In Europe, bond yields are climbing steadily, with German, French, Spanish, and Italian yields all extending their upward momentum. Over in the UK, the 10-year yield has surged past last year’s high of 4.755%, touching levels not seen since the 2008 financial crisis at nearly 5%. Even Japan has joined the mix, with its 10-year yields hitting 1.20%, their highest level since May 2011, although still relatively modest.

The takeaway? Bond yields are rising across the board, fuelled by resilient US economic data and persistent global inflation—except for China. With higher yields offering attractive returns, investors may hesitate to buy overbought growth stocks and government debt is proving a tempting alternative. This is an additional bearish factor for risk-sensitive currencies like the euro.

US CPI and Chinese GDP among this week’s highlights

All eyes will be on the US Consumer Price Index (CPI) release this Wednesday. Any indication of stubborn inflation could dash any remaining hopes of a Fed rate cut in the first half of the year, further bolstering the dollar. Conversely, a surprisingly weak CPI print could offer the Euro some breathing room, although a significant shift in market sentiment seems unlikely without a major downside surprise.

Later in the week, Friday’s Chinese GDP release, along with retail sales and industrial production data, will also be in the spotlight. The Chinese economy’s sluggish performance has already impacted global markets, with weaker growth dampening demand for European exports. Any further signs of economic slowdown in China could exacerbate concerns about the Eurozone’s growth prospects, amplifying the bearish EUR/USD forecast.

Where is EUR/USD headed?

Source: TradingView.com

The near-term outlook for EUR/USD remains tilted to the downside, with the pair likely to test and possibly break below the parity (1.000) level if data this week favours the dollar, or we see further rising in US yields. Persistent geopolitical tensions and weak economic performance in the Eurozone only add to the challenges for the Euro. Traders should stay cautious and watch for significant shifts in market sentiment, particularly around Wednesday’s CPI data. While the dollar’s bullish momentum shows no immediate signs of slowing, a potential inflection point could arise if inflation surprises to the downside or Chinese data beats expectations, offering a glimmer of hope for the Euro.

In terms of resistance levels to watch, 1.0300-1.0340 now marks a key resistance zone, having previously served as support. The bearish trend line comes in just above this zone, too. While below these levels, the path of least resistance on the EUR/USD is unambiguously bearish.

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

• Taking a look at the dollar against the Japanese yen and you can see it was an extraordinarily volatile session during the trading session on Friday after the jobs report came out stronger than anticipated, which naturally had people running to the Japanese yen.
• This was a very difficult trading session for anybody who was involved and therefore if you find yourself on the wrong side of the trade, don’t be too upset about it.

I think at this point, you have to look to the longer term outlook for both of these central banks. And the reality is, even though Japan’s getting a little better, the U.S. economy is still very strong. And as a result, you should continue to see the U.S. dollar strengthen against most currencies, including the Japanese yen, but I also recognize that with the sell-off that we had seen in the stock market, it does make a certain amount of sense that people might’ve been looking for the safety of the Japanese yen, specifically Japanese investors involved in America.

Long Term

But in the longer term, you do get paid to hang on to this USD/JPY pair. And I think that’s something that a lot of people ignore, at least in the retail space. If we can break above the 158 yen level, then I think you’ve got a situation where we could make another attempt to break out completely, but right now it looks like we’re going to bounce around a little bit and just panic.

That’s not that unusual for this pair, but it’s difficult to make an argument for anything other than an uptrend right now. So I wouldn’t read too much into this other than there might’ve been some liquidity issues. The Bank of Japan might’ve been involved. We just don’t know, and of course, there was a lot of repositioning after that non-farm payroll announcement. I remain bullish, but I recognize this is going to be a headache.

Want to trade our USD/JPY forex analysis and predictions? Here’s a list of forex brokers in Japan to check out.