STORY LINK Pound to Euro Week Ahead Forecast: September Holds Key for GBP/EUR

Goldman Sachs forecasts that the Pound to Euro (GBP/EUR) exchange rate will strengthen to 1.22 on a 12-month view.

During the week, GBP/EUR strengthened to 5-week highs just above 1.19 before a correction to 1.1875. The pair remains close to the resistance levels above 1.19 which were tested in July.

Other investment banks such as ING have dropped near-term expectations of GBP/EUR losses.

UK and global developments during September could be crucial in determining whether bearish views are reinstated or dropped more permanently.

ING has been bearish on GBP/EUR, but notes that rates have moved in the opposite direction; “The EUR:GBP 2-year swap rate gap shifted in favour of GBP of late thanks to some hawkish repricing in the Sonia curve and markets adding ECB easing bets yesterday. It is now at -146bp, the widest since February, meaning that a rebound in EUR/GBP now requires a meaningful rebuilding in Bank of England easing expectations.”

It added; “That seems unlikely to happen until we get new tier-one data in the UK, as BoE officials have broadly reiterated a cautious stance on easing.”

Euro-Zone data was an important element for the Euro and GBP/EUR during the week.

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There was a further limited retreat in the German IFO business confidence index, reinforcing concerns over the outlook.

Oxford Economics commented; ‘We think it will take Germany’s manufacturing sector until the end of this year to emerge from the economic slump, but the deterioration in the services sector highlights the broad weakness in the German economy.”

German and Spanish inflation readings for August were weaker than expected.

The headline Euro-Zone inflation rate declined to 2.2% for August from 2.6% previously which was in line with consensus forecasts and the lowest reading for three years.

The core rate edged lower to 2.8% from 2.9%.

There are strong expectations that the ECB will cut rates in September.

Domestically, the Lloyds Bank business confidence index held at 50% for August.

Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, commented; “Overall, the economy looks to be stable and from the positive results recorded, businesses are echoing this sentiment.”

According to Goldman Sachs, UK data signals have been important; “Whereas our constructive view on the Pound relies heavily on its external betas, with the positive global risk sentiment on the back of lower yields helping the currency, domestic data are now playing an increasingly important role.”

JP Morgan noted the recent firm UK data and was particularly impressed by the employment components within the PMI report.

The bank has previously recommended buying GBP/EUR and maintains a positive stance; “We think the relative growth dynamics alone justify the pair trading cheap to fair value, and so that partly motivates our decision to keep the trade on. Elsewhere, we see a potential further normalisation in FX volatility as being favourable for the trade, making it more attractive for GBP longs.

It also considers that GBP/EUR has weathered traditionally negative seasonal factors during the Summer period which increases the scope for gains.

Rabobank also maintains a positive stance; “we look for the pound to perform well against both the USD and the EUR into next spring.”

Credit Agricole expects European currencies will struggle, but with scope for net GBP/EUR gains; “We continue to see the risks for both the EUR and the GBP to the downside from current levels in the near term. In that, the combination of weak economic data, dovish central bank rhetoric and persistent political risks could make the EUR the relative underperformer.”

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• US employment figures showed that the labor market is slowing down.

• The US nonfarm payrolls report showed a smaller-than-expected job increase in August.

• US inflation data will be the last major report before the Fed’s policy meeting.

The GBP/USD weekly forecast shows a temporary pause in a solid bullish trend as investors await the first Fed rate cut while the US NFP gives no clear direction. 

Ups and downs of GBP/USD

The pound had a bearish week, fluctuating amid mixed US economic data. Meanwhile, the UK provided few catalysts. Employment figures showed that the labor market is slowing down. Vacancies fell more than expected, and private job growth slowed.

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Meanwhile, the nonfarm payrolls report showed a smaller-than-expected job increase in August. However, the unemployment rate held steady at 4.2%. Meanwhile, data on business activity in the services sector showed a better-than-expected improvement, indicating a resilient economy. 

Next week’s key events for GBP/USD

Next week, investors will pay attention to the UK’s employment and GDP data. Meanwhile, the US will release consumer and producer inflation data. The pound has benefitted in recent weeks due to expectations for fewer rate cuts in the UK compared to the US.

Therefore, if UK wage growth confirms fears that British services inflation remains high, BoE rate cut expectations might drop, boosting the pound. Moreover, the pound would rally, given the declining US labor market. The Fed is in a better position to start lowering borrowing costs. 

Meanwhile, US inflation data will be the last major report before the Fed’s policy meeting. Softer-than-expected figures will increase the likelihood of a 50-bps rate cut.

GBP/USD weekly technical forecast: Bullish trend pauses for a brief pullback

On the technical side, the GBP/USD price is in a bullish trend. Although the price chops through the 22-SMA, it has maintained an upward trajectory. This means it has made a series of higher highs and lows. At the same time, the RSI has traded mostly above 50, supporting solid bullish momentum. 

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Bulls recently broke above the critical resistance level of 1.3000. However, they failed to trade above the 1.3200 resistance, allowing bears to take charge. Nevertheless, the bullish bias remains intact since the price is still above the SMA. Therefore, the pullback will likely pause at the SMA and bounce higher. On the other hand, if it punctures the SMA and the 1.3000 level, it might find support at the bullish trendline. A new high above 1.3200 will continue the bullish trend.

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• USD/JPY downtrend continues, as downward momentum accelerates after volatility from US Nonfarm Payrolls data.
• Key support levels include 142.50, 142.00, and today’s low of 141.77, with further downside likely if these are breached.
• Resistance stands at 143.44, with higher targets at 144.49 (Tenkan-Sen) and 145.00 (Senkou Span A) if bulls regain control.

The USD/JPY extended its losses late on Friday’s North American session, bolstered by the losses of the yield of the US 10-year T-note. The Greenback recovered some ground against most G8 FX currencies, except safe-haven currencies like the Japanese Yen. At the time of writing, the pair trades at

USD/JPY Price Forecast: Technical outlook

The USD/JPY downtrend continued after the latest US Nonfarm Payrolls report sparked volatility in the pair, which seesawed within a 230-pip range on the day, but as the dust settled, sellers remained in charge.

Momentum had accelerated to the downside, confirmed by the Relative Strength Index (RSI) aiming lower, an indication of a strong trend.

The USD/JPY’s first support would be the psychological level of 142.50. Once surpassed, the next stop would be the 142.00 mark, followed by today’s low of 141.77. Once those two levels are cleared, the drop could extend toward the August 5 low of 141.69.

On the other hand, the first resistance would be the August 26 daily low of 143.44. A breach of the latter would expose key resistance levels. First, the Tenkan-Sen will be at 144.49, followed by the Senkou Span A at 145.00. Up next would be the Kijun-Sen at 145.73.

USD/JPY Price Action – Daily Chart

• EUR/USD holds steady above 1.1100 after a two-day rally.
• The bullish bias remains intact in the near term.
• Nonfarm Payrolls in the US are forecast to rise 160,000 in August.

EUR/USD registered strong gains for the second consecutive day on Thursday before entering a consolidation phase above 1.1100 in the European session on Friday. Investors refrain from taking large positions while waiting for the US Bureau of Labor Statistics to release the August jobs report.

The data published by the Automatic Data Processing showed on Thursday that employment in the private sector rose 99,000 in August. This reading missed the market expectation of 145,000 by a wide margin and triggered another leg of US Dollar (USD) selloff.

Nonfarm Payrolls (NFP) in the US are forecast to rise 160,000 in August following July’s disappointing increase of 114,000. In case this data comes in near 100,000, investors could lean toward a large September Federal Reserve (Fed) rate cut and force the USD to continue to weaken against its major rivals. According to the CME FedWatch Tool, markets are currently pricing in a 43% probability of a 50 basis points rate cut at the upcoming policy meeting.

On the other hand, a positive surprise in NFP, with a print close to 200,000, could help the USD rebound and cause EUR/USD to correct lower heading into the weekend.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart stays slightly below 70, suggesting that EUR/USD has more room on the upside before turning technically overbought. On the upside, 1.1160 (static level) aligns as immediate resistance ahead of 1.1200 (end-point of the latest uptrend) and 1.1250 (static level from July 2023).

In case EUR/USD drops below 1.1100 (100-period Simple Moving Average (SMA), 50-period SMA, Fibonacci 23.6% retracement) and starts using this level as resistance, technical sellers could take action. In this scenario, 1.1040 (Fibonacci 38.2% retracement) could be seen as next support before 1.1000 (200-period SMA, Fibonacci 50% retracement).

EUR/USD Current price: 1.1083

• German inflation fell more than anticipated in August,  rising by 1.9% YoY.
• The United States upwardly revised the Q2 Gross Domestic Product to 3%.
• EUR/USD at fresh weekly lows and technically poised to extend its slide.

The EUR/USD pair fell to 1.1072 early on Thursday, bouncing just modestly from the level and trading near such a low ahead of the United States (US) opening. The US Dollar gathered momentum during European trading hours, as a sour sentiment dominated the first half of the day.

NVIDIA, the leading AI and chip giant, reported earnings after Wednesday’s close, which beat expectations, yet shares fell roughly 8% after the news. Analysts attributed the decline to the fact that revenue guidance for the current quarter missed some estimates, while the company reported that it was facing difficulties in developing a new generation of chips.

Asian indexes closed in the red, but European ones shrugged off the dismal mood and hold in the green, halting the USD advance.

Data-wise, Germany released the preliminary estimates of the August inflation data, which surprised investors by falling more than anticipated. The Consumer Price Index (CPI) rose 1.9% YoY, below the 2.1% anticipated, while the CPI was down 0.1% compared to the previous month. The broader Harmonized Index of Consumer Prices (HICP) increased by 2.0% in the year to August and fell by 0.2% compared to July.

Across the Atlantic, the US published Initial Jobless Claims for the week ended August 23, which decreased to 231K, beating expectations. At the same time, the second estimate of the Q2 Gross Domestic Product (GDP) was upwardly revised to 3% from the previous estimate of 2.8%. The encouraging data provided additional support to the USD.

EUR/USD short-term technical outlook

The daily chart for the EUR/USD pair suggests more slides are on the docket. The pair fell for a second consecutive day, resulting in technical indicators heading firmly south, although still above their midlines. The bearish momentum, however, remains the same. At the same time, the 20 Simple Moving Average (SMA) maintains its bullish slope, providing dynamic support at around 1.1020. A break below the latter should fuel selling.

In the near term, and according to the 4-hour chart, the downward momentum eased, but the risk remains skewed to the downside. Technical indicators are stabilizing near oversold readings, still far from suggesting downward exhaustion. Meanwhile, the 20 SMA has turned lower well above the current level, acting as dynamic resistance at around 1.1145.

Support levels: 1.1065 1.1020 1.0985

Resistance levels: 1.1110 1.1145 1.1190  

• The Pound Sterling reached a two-year high against the US Dollar amid a renewed rise in global equity markets, with one market expert saying that any weakness would only invite more buying interest.
• According to reliable trading platforms, the GBP/USD currency pair rose to the resistance level of 1.3265, its highest in two years.
• Its gains came with European equity markets outperforming and traders continuing to play on the theme of divergent monetary policy between the US and the UK.

Overall, US equity markets seem poised to start the day on a decline, but German and British markets are recovering and rising by about half a percent each. Obviously, that’s indicating demand for European assets that is helping the Pound Sterling. Commenting on this, a note from the JPMorgan forex trading desk states: “Despite all my doubts, the Pound Sterling continues to trade like a rock star as we easily exit the triple top at 1.3145 after Jerome Powell’s comments.”

According to forex market trading, the GBP/USD rose last Friday after Powell showed a clear intention to cut US interest rates in September, as financial markets were surprised by the extent of his commitment to this move. Previously, the Federal Reserve had insisted that it would move cautiously on cutting US interest rates, but Powell’s speech seemed like a “pause” moment.

In fact, financial markets have seen good odds that the Federal Reserve will start the cut cycle with a large 50 basis point hike, which was still seen as an unlikely scenario before his speech. Consequently, the result is a selling of the US dollar that extends into Tuesday and takes the GBP/USD pair to a new high for 2024 at 1.3260.

According to technical analysis, there is not much on the upside for the GBP/USD pair in terms of levels, except for a secondary pivot zone at 1.3275/00. Also, we struggle to reinvest meaningfully in the Pound Sterling here, and we acknowledge that declines towards the 1.3145 pivot should be bought in the coming sessions.

The Pound Sterling is also supported by Bank of England Governor Andrew Bailey’s speech last Friday, in which he said it is too early to say that the battle against inflation is over, indicating that the bank will not be in a hurry to cut interest rates again. According to analysts, Bailey seems relatively comfortable about inflation, and we have seen the first decline in the BRC in nearly three years, but falling prices are treated as a boon for the currency.

The British Retail Consortium (BRC) said its measure of shop price changes showed prices fell by 0.3% in August, down from +0.2% in July. Moreover, this is below the three-month average of 0.0%, and annual shop price growth remained at its lowest level since October 2021. UK inflation has been falling since 2023, but this means that the pace of increase has only been slowing. Furthermore, the outright falls in prices offer relief to shoppers as the absolute level of goods resulting from a period of abnormal inflation can begin to fall and boost purchasing power.

On the other hand, the yield on 10-year UK bonds is falling. According to electronic trading, the yield on 10-year UK bonds has fallen to 3.95% as investors expect lower interest rates. Earlier in August, the Bank of England cut its benchmark interest rate by 25 basis points to 5%, with markets expecting further cuts of 41 basis points by the end of the year. However, better-than-expected UK economic data and cautious comments from Bank of England Governor Andrew Bailey about further rate cuts have tempered these expectations.

Meanwhile, British Prime Minister Keir Starmer has highlighted the long road ahead to address the issues he attributes to the previous Conservative government, warning that conditions could worsen before they improve. In the United States, weak economic data and comments by Federal Reserve Chairman Jerome Powell have fuelled speculation of future interest rate cuts by the Fed.

On the stock trading platforms front, British stocks paused after four days of gains. According to trading, the FTSE 100 index fluctuated between small gains and losses on Wednesday after four days of gains, as investors exercised caution ahead of Nvidia’s quarterly results, which could impact the AI-driven global stock rally. Among individual stocks, Kingfisher shares fell 2% after Citigroup downgraded it to “neutral” from “buy.” Prudential shares fell 1% after reporting weaker performance in China and Indonesia. On the positive side, the pharmaceutical sector gained, with GSK shares rising 2%. GSK, along with other pharmaceutical companies, is resuming in Delaware to end more than 70,000 lawsuits alleging that the discontinued heartburn drug Zantac causes cancer. Direct Line Insurance shares rose 1.2% after Citigroup upgraded it to “neutral” from “buy,” boosting non-life insurers.

Technical forecasts for the GBP/USD pair today:

Based on the daily chart performance, the overall trend of the GBP/USD pair remains bullish. However, it’s crucial to consider that today’s US economic data results will significantly impact the sentiment towards the continued weakness of the US dollar. If the data is negative, it could reverse the pair’s direction and turn it bearish, requiring a break below the support level of 1.3045

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• Ahead of a batch of crucial US economic data, the Japanese Yen traded around 144 Yen against the US Dollar, hovering near its strongest levels in three weeks.
• This comes as the prospect of interest rate cuts by the Federal Reserve continues to weigh on the US Dollar while other major currencies have benefited.
• Federal Reserve officials have sounded the alarm about Labor market risks while expressing confidence that US inflation will return to the target level, indicating a readiness to cut borrowing costs soon.

In contrast, Bank of Japan Governor Kazuo Ueda told parliament last week that the BOJ could adjust monetary policy if its economic outlook holds, signaling a willingness to raise interest rates again. BOJ Deputy Governor Ryozo Himeno echoed that sentiment this week, saying the central bank would raise rates if the economy and prices continued on their current path.

On the stock trading front, Japanese stocks rose as Nvidia earnings awaited. The Nikkei 225 index of Japanese shares rose 0.22% to close at 38,372, while the broader TOPIX index rose 0.42% to close at 2,692 on Wednesday. Furthermore, Japanese stocks rose for a second straight session as investors looked ahead to Nvidia’s earnings report that could fuel a further rise in technology and artificial intelligence. Also, local stocks benefited from a weaker yen as investors continued to assess the Bank of Japan’s monetary policy outlook. Recently, BOJ Deputy Governor Ryozo Himino said the central bank would adjust the degree of monetary easing if the outlook for economic activity and prices improves. Strong performances were seen from index heavyweights Toyota Motor Corp (3.9%), Disco Corp (1.4%), Advantest (4.2%), Sony Group (2.3%) and Hitachi (2.5%). Additionally, Rakuten Group shares rose 9.2% after Morgan Stanley and Citi raised their price targets for the Japanese technology company.

On the economic front, Japan’s index of coincident economic indicators, which covers a range of data such as factory output, employment and retail sales, was revised down to 113.2 in June 2024 from a preliminary reading of 113.7. The figures followed May’s reading of 117.1, indicating the lowest level since February while maintaining a “stop falling” assessment, as the economy continues to recover moderately despite growing global headwinds, particularly from China, the US and Europe.

Meanwhile, Japanese consumer prices are expected to rise after energy subsidies were fully ended in May while the Bank of Japan has begun to consider policy normalization amid a weaker currency.

USD/JPY Technical Analysis and Expectations Today

According to the performance on the daily chart, the general trend of the USD/JPY price is still bearish. Also, investors do not care about the technical indicators moving towards strong oversold levels as much as they care about what is being said by global central bank officials regarding the future of raising interest rates or not. Currently, the closest important support levels for trading the USD/JPY are 142.60 and 141.00 respectively. Today’s US economic data: GDP growth and weekly jobless claims.

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• Tensions in the Middle East had investors rushing for the greenback.

• Incoming data might alter expectations for the size of Fed rate cuts.

• ECB policymakers are ready to start lowering borrowing costs in September.

The EUR/USD forecast points south as the dollar rallies ahead of GDP and inflation data. As Middle East tensions escalate, the dollar has recovered from recent lows due to safe-haven demand. Meanwhile, ECB policymakers are getting comfortable with a rate cut in September.

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The dollar was initially weak after Powell’s speech on Friday, which solidified bets for a September Fed rate cut. However, the trend reversed this week as tensions in the Middle East had investors rushing for the greenback. The Gaza war has grown, and prospects of a ceasefire agreement have dimmed. The dollar tends to rise in times of global uncertainty. 

However, downward pressure remains as investors fully price a Fed pivot in September. Incoming data might alter expectations for the size of rate cuts. Currently, there is a higher chance of a 25-bps rate cut. However, further economic weakness and easing price pressure could lead to a more significant rate cut. 

Market participants expect GDP data today to show the economy’s state. Recent GDP figures have shown resilience, so an unexpectedly poor figure could boost rate-cut expectations. At the same time, the US will release its PCE price index on Friday, showing the state of inflation. 

Meanwhile, ECB policymakers are ready to start lowering borrowing costs in September. However, some, like Klaas Knot, remain cautious, saying more data is needed to confirm the rate cut.

EUR/USD key events today

• US prelim GDP q/q
• US unemployment claims

EUR/USD technical forecast: Bears eye the 1.1050 support after reversal

On the technical side, the EUR/USD price is collapsing after breaking below and retesting the 30-SMA. This is a sign that bears have taken charge and reversed the trend. The previous bullish trend peaked at the 1.1201 resistance level, where bullish momentum weakened.

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Notably, the RSI made a bearish divergence, showing fading momentum as the price made higher highs. Eventually, bears overpowered bulls, pushing the price below the 30-SMA. At the same time, the RSI dipped below 50 to trade in bearish territory. The price might soon reach the 1.1050 support level due to the strong bearish bias.

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