2024-05-02 14:43:03 ET

The EUR/USD exchange rate rose for the second day straight even as it became clear that the European Central Bank (ECB) and the Federal Reserve will diverge this year. The pair rose to a high of 1.0725 ahead of Friday’s

nonfarm payrolls data

.

Fed and ECB will diverge

There are signs that the Feed and the ECB will diverge this year. In a statement on Wednesday, the Fed noted that the American economy was still strong because of strong consumer spending. It also remained muted on when it will start to cut interest rates.

Economists have mixed opinions on when the rate cuts will start. Some of them believe that the cuts will start later this year while others expect them to come in 2024 since inflation remains stubbornly high.

The headline Consumer Price Index (CPI) rose to 3.5% in March while the Personal Consumption Expenditure (PCE) rose to 2.5%. These numbers mean that inflation has stopped falling and that it could take longer before reaching the Fed’s 2% target.

Some analysts believe that the Fed’s posture is wrong since the economy is showing some signs of strains. For example, while consumer spending is continuing, it has been powered by borrowing. The most recent data shows that

credit card debt

has risen to $1.7 trillion. Household debt has risen to $17.5 trillion while default rates are rising.

At the same time, some economic numbers are pointing to weakness in the economy. Manufacturing PMI fell to below 50 in April while consumer confidence has dropped sharply. Other numbers like retail sales and industrial production have not been doing well.

Friday’s nonfarm payroll numbers are set to show that the economy created over 248k jobs. However, a closer look will likely show that most of these were part-time jobs. Over

8 million

Americans are holding at least two jobs.

Elsewhere, the European Central Bank (ECB) is committed to start cutting interest rates in June. Europe’s inflation has dropped to 2.4% and lower energy costs will likely push it to the 2% target soon. The

bloc’s manufacturing activity

is also contracting while most consumers are struggling.

Therefore, in the near term, there is a possibility that the carry trade opportunity will lead to a stronger US dollar and a weaker euro.

EUR/USD technical analysis

The EUR to USD pair has held steady in the past two days partly because of the moderately dovish Federal Reserve. It has remained steady above the key support level at 1.0700. The pair has also formed a small ascending channel, which has a resemblance to a bearish flag pattern.

The EURUSD pair has moved below the 50-day moving average. It has moved slightly above the key support at 1.0697, its lowest swing on February 14th. Therefore, the outlook for the pair is bearish as the focus shift to Friday’s job numbers.

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EUR/USD forecast: signal ahead of US NFP data

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• The pound sterling has settled around $1.25, while the US dollar remains near its November peak, supported by expectations of a more cautious stance from the Bank of England compared to the US Federal Reserve on monetary policy.
• GBP/USD’s rebound gains did not exceed the 1.2565 level and is stabilizing around 1.2520 at the start of trading on Thursday.

According to the results of the economic calendar data, Recent market sentiment suggests an 80% chance that the Bank of England will make its first move in August, followed by a 60% chance of a cut later this year. Conversely, the likelihood of the US Federal Reserve implementing its first interest rate cut in September has diminished, reflecting concerns about slow progress in reining in inflation to the 2% target. For his part, Bank of England Governor Andrew Bailey recently indicated that British inflation appears ready to meet the 2% target, while his colleagues Megan Green and Hugh Bell spoke in a more hawkish tone, indicating that it is too early to consider interest rate cuts.

On the economic side, The UK S&P Global UK Manufacturing PMI was revised slightly higher to 49.1 in April 2024, up from the initial estimate of 48.7 but down from the 20-month high recorded in March of 50.3. Equally, production and new orders fell back into contraction territory after short-lived upswings in March, amid uncertain market conditions, customers depleting inventories, and supply chain disruptions.

In addition, the decline in new export business extended to 27 consecutive months, with reports of weaker imports from Germany, Ireland, Asia, and the United States. British employment levels also fell for the nineteenth month in a row. On the price front, input price inflation accelerated to its highest levels since February 2023, and production fee inflation reached its highest level in 11 months.

Finally, the outlook for the UK manufacturing sector remained positive in April due to hopes for a recovery in demand, new product launches, efficiency gains, and improving market conditions.

On another level, it has a strong influence on the performance of the Forex currency market. The US Federal Reserve kept the target range for the federal funds rate unchanged at 5.25%-5.50% during its May meeting for the sixth consecutive time, as persistent inflationary pressures and a tight labor market indicate that progress towards returning inflation to normal levels has stalled. Policymakers acknowledged that although inflation moderated over the past year, it remains high, and there has been a noticeable lack of further progress towards achieving the US central bank’s target in recent months.

However, Chairman Jerome Powell stated that he does not expect a potential rise and believes current policy is sufficiently restrictive to achieve the 2% inflation target. Also, the Fed announced its intention to reduce the speed of its quantitative tightening starting on June 1. This is an adjustment that will include reducing the maximum amount of Treasury bonds that are removed from the balance sheet by more than 50%, down to $25 billion per month from the previous balance sheet.

Technical forecasts for the GBP/USD pair today:

Recently, the price of the GBP/USD pair has risen to trade at approximately the 100-hour moving average line. A late pullback on Wednesday prevented the currency pair from entering overbought levels of the 14-hour RSI. In the near term, and according to the performance on the hourly chart, it appears that the GBP/USD currency pair has recently completed an upward breakthrough from the formation of a descending channel. Technically, the 14-hour RSI appears to be supporting the upside as it approaches overbought levels. Therefore, the bulls will target extended bounces at around 1.2544 or higher at 1.2587 resistance. On the other hand, the bears will look to pounce on pullbacks at around 1.2467 or lower at the 1.2424 support.

In the long term, and according to the performance on the daily chart, it appears that the GBP/USD currency pair has also completed an upward breach from the formation of the descending channel. Also, the 14-day RSI appears to support a long-term bullish bias after a bounce to avoid falling into oversold levels. Therefore, bulls will target long-term profits at around 1.2705 or higher at 1.2888 resistance. On the other hand, the bears will look to pounce on profits at around 1.2303 or lower at the 1.2100 support.

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• EUR/USD maintained its consolidative theme around 1.0700.
• The US Dollar alternated gains with losses post Fed’s rate decision.
• The upcoming NFP should add to speculations around the timing of rate cuts.

The US Dollar’s (USD) inconclusive price action sparked an equally vacillating move in EUR/USD on Thursday, always surrounding the 1.0700 neighbourhood.

This irresolute momentum of the Greenback came pari passu investors’ assessment of the latest Federal Reserve’s (Fed) decision to maintain its interest rates unchanged at 5.25%-5.50% on Wednesday.

In that event, it is worth recalling that the Committee reaffirmed its stance on the Fed Funds Target Range (FFTR) at 5.25%–5.50%, expressing intentions for rate cuts but expressing concerns about inflation and potential disruptions in economic equilibrium. Additionally, the central bank announced intentions to slow down the pace of balance sheet reduction, contrasting with previous warnings.

In addition, Chair Jerome Powell’s remarks further weighed on the Dollar, as he argued that the next policy adjustment is unlikely to involve a rate hike.

In the longer term, weakness in the US Dollar is expected to be temporary due to delayed expectations of a potential interest rate cut by the Federal Reserve (Fed) later this year.

Meanwhile, US yields maintained their decline, while the broader macroeconomic landscape kept pointing to the divergence in monetary policies between the Fed and other G10 central banks, particularly the European Central Bank (ECB).

Recent statements from ECB board members suggested the possibility of the ECB initiating its easing cycle in June, sparking speculation about three interest rate cuts (or 75 basis points) for the remainder of the year.

Looking ahead, the relatively muted economic fundamentals in the Eurozone, along with the resilience of the US economy, reinforce expectations for a stronger Dollar in the medium term, especially considering the increasing likelihood of the ECB cutting rates well before the Fed.

In this context, EUR/USD is anticipated to undergo a more pronounced decline in the medium term.

EUR/USD daily chart

EUR/USD short-term technical outlook

On the upside, EUR/USD is projected to face first resistance at the weekly high of 1.0752 (April 26), which comes before the significant 200-day SMA of 1.0798 and the April top of 1.0885 (April 9). North from here comes the March peak of 1.0981 (March 8), followed by the weekly high of 1.0998 (January 11), all before reaching the psychological barrier of 1.1000.

Looking south, a break of the 2024 low of 1.0601 (April 16) might indicate a return to the November 2023 low of 1.0516 (November 1), which precedes the weekly low of 1.0495 (October 13, 2023). Once this region is achieved, a trip to the 2023 bottom of 1.0448 (October 3) is feasible before achieving the round milestone of 1.0400.

The 4-hour chart indicates some consolidation, with the pair currently targeting 1.0752, ahead of the 200-SMA at 1.0756. Meanwhile, 1.0673 offers early support, ahead of 1.0601 and 1.0516. The relative strength index (RSI) rose past 52.

• EUR/USD maintained its consolidative theme around 1.0700.
• The US Dollar alternated gains with losses post Fed’s rate decision.
• The upcoming NFP should add to speculations around the timing of rate cuts.

The US Dollar’s (USD) inconclusive price action sparked an equally vacillating move in EUR/USD on Thursday, always surrounding the 1.0700 neighbourhood.

This irresolute momentum of the Greenback came pari passu investors’ assessment of the latest Federal Reserve’s (Fed) decision to maintain its interest rates unchanged at 5.25%-5.50% on Wednesday.

In that event, it is worth recalling that the Committee reaffirmed its stance on the Fed Funds Target Range (FFTR) at 5.25%–5.50%, expressing intentions for rate cuts but expressing concerns about inflation and potential disruptions in economic equilibrium. Additionally, the central bank announced intentions to slow down the pace of balance sheet reduction, contrasting with previous warnings.

In addition, Chair Jerome Powell’s remarks further weighed on the Dollar, as he argued that the next policy adjustment is unlikely to involve a rate hike.

In the longer term, weakness in the US Dollar is expected to be temporary due to delayed expectations of a potential interest rate cut by the Federal Reserve (Fed) later this year.

Meanwhile, US yields maintained their decline, while the broader macroeconomic landscape kept pointing to the divergence in monetary policies between the Fed and other G10 central banks, particularly the European Central Bank (ECB).

Recent statements from ECB board members suggested the possibility of the ECB initiating its easing cycle in June, sparking speculation about three interest rate cuts (or 75 basis points) for the remainder of the year.

Looking ahead, the relatively muted economic fundamentals in the Eurozone, along with the resilience of the US economy, reinforce expectations for a stronger Dollar in the medium term, especially considering the increasing likelihood of the ECB cutting rates well before the Fed.

In this context, EUR/USD is anticipated to undergo a more pronounced decline in the medium term.

EUR/USD daily chart

EUR/USD short-term technical outlook

On the upside, EUR/USD is projected to face first resistance at the weekly high of 1.0752 (April 26), which comes before the significant 200-day SMA of 1.0798 and the April top of 1.0885 (April 9). North from here comes the March peak of 1.0981 (March 8), followed by the weekly high of 1.0998 (January 11), all before reaching the psychological barrier of 1.1000.

Looking south, a break of the 2024 low of 1.0601 (April 16) might indicate a return to the November 2023 low of 1.0516 (November 1), which precedes the weekly low of 1.0495 (October 13, 2023). Once this region is achieved, a trip to the 2023 bottom of 1.0448 (October 3) is feasible before achieving the round milestone of 1.0400.

The 4-hour chart indicates some consolidation, with the pair currently targeting 1.0752, ahead of the 200-SMA at 1.0756. Meanwhile, 1.0673 offers early support, ahead of 1.0601 and 1.0516. The relative strength index (RSI) rose past 52.

GBP/JPY Forecast Video for 28.06.23

British Pound vs Japanese Yen Technical Analysis

In Tuesday’s trading session, the British pound initially attempted to rally against the Japanese yen but quickly relinquished its gains. While this may not indicate a significant shift in the market, it suggests a possible overextension. Notably, the ¥180 level holds potential as a supportive barrier due to its psychological significance and recent history of providing substantial support. However, if the market breaches this level, the next important monitoring levels are ¥177.50, followed by ¥175. The 50-Day Exponential Moving Average is rapidly approaching the ¥175 level, likely to serve as a critical support level.

On the upside, the ¥183 level poses a short-term resistance point and target. However, it is only a matter of time before this resistance will likely be overcome. The significant interest rate differential between Great Britain and Japan makes this currency pair appealing to traders seeking to capitalize on swap opportunities.

Currently, selling the British pound against the Japanese yen is unattractive, as there are no compelling reasons to do so. Unless there is an imminent shift in Japan’s monetary policy, which seems unlikely in the near term, traders will likely continue favoring buying this pair. While Japanese officials occasionally express concerns about sharp movements in the forex markets, these remarks are generally perceived as mere lip service. Consequently, any significant sell-off following statements from Tokyo is likely to be viewed as a favorable buying opportunity. The prevailing trend is expected to persist, and it is plausible that this currency pair could reach the ¥200 level in the long term, potentially by the end of the year.

However, it is important to note that occasional pullbacks and periods of volatility can be expected. While the overall trend remains intact, the market cannot go straight up in the air forever. As a result, traders should be prepared for volatility in the pair.

In conclusion, the British pound faced resistance against the Japanese yen after a brief rally, indicating a potential overextension in the market. The ¥180 level holds significance as a support level, while further downside targets include ¥177.50 and ¥175. On the upside, the ¥183 level poses a short-term resistance, but its eventual breach is anticipated. The substantial interest rate differential between the two currencies supports the continued buying interest in this currency pair. Traders should remain vigilant for potential fluctuations while acknowledging the prevailing upward pressure in their analysis.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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EUR/USD Current price: 1.0693

• Eurozone HCOB Manufacturing PMIs were upwardly revised in April.
• Financial markets remain optimistic despite mixed US data.
• EUR/USD gains downward traction in the near term, support at 1.0645.

The US Dollar is in recovery mode on Thursday after edging sharply lower on Wednesday following the United States (US) Federal Reserve (Fed) monetary policy announcement. The Fed kept rates on hold and was mostly hawkish, as anticipated. However, the news were less concerning than expected, as Chairman Jerome Powell and co seemed not terribly concerned about the economic situation and maintained the door open for upcoming rate cuts.

The USD edged sharply lower with the news, pushing EUR/USD towards the 1.0730 region. The Greenback managed to recover some ground during Asian trading hours and early in Europe, but retains its weak tone amid an optimistic market mood.

Data-wise, the Hamburg Commercial Bank (HCOB) and S&P Global released the final estimates of their April Manufacturing PMIs. European figures were encouraging, as the German index was confirmed at 42.5, while the Eurozone one hit 45.7, both above the previous estimates. In the US, the Goods and Services Trade Balance posted a deficit of $69.4 billion in March, worse than anticipated. Initial Jobless Claims declined to 208K in the week ending April 26, beating the 212K expected. Finally, Nonfarm Productivity in the first quarter of the year rose a modest 0.3%, while Unit Labor Cost in the same period was up 4.7%, higher than the 3.6% forecast.

EUR/USD short-term technical outlook

The USD remains on the back foot against most major rivals,  with EUR/USD hovering around 1.0700 ahead of Wall Street’s opening. The daily chart offers a neutral picture, although the risk skews to the downside. The pair is still battling to recover above a bearish 20 Simple Moving Average (SMA) to no avail. At the same time, the 100 and 200 SMAs gain downward traction far above the longer ones. Finally, the Momentum indicator aims higher within neutral levels, while the Relative Strength Index (RSI) indicator suggests limited buying interest, consolidating at around 45.

The 4-hour chart shows bears are gaining strength. Technical indicators turned lower, although within neutral levels. At the same time, the pair is pressuring a flat 20 SMA while the 100 SMA heads south a few pips below the shorter one. A break through 1.0645 should anticipate a steeper decline, with eyes on a break below 1.0600, the year´s low.

Support levels: 1.0645 1.0600 1.0565

Resistance levels: 1.0740 1.0785 1.0810

EUR/USD Current price: 1.0693

• Eurozone HCOB Manufacturing PMIs were upwardly revised in April.
• Financial markets remain optimistic despite mixed US data.
• EUR/USD gains downward traction in the near term, support at 1.0645.

The US Dollar is in recovery mode on Thursday after edging sharply lower on Wednesday following the United States (US) Federal Reserve (Fed) monetary policy announcement. The Fed kept rates on hold and was mostly hawkish, as anticipated. However, the news were less concerning than expected, as Chairman Jerome Powell and co seemed not terribly concerned about the economic situation and maintained the door open for upcoming rate cuts.

The USD edged sharply lower with the news, pushing EUR/USD towards the 1.0730 region. The Greenback managed to recover some ground during Asian trading hours and early in Europe, but retains its weak tone amid an optimistic market mood.

Data-wise, the Hamburg Commercial Bank (HCOB) and S&P Global released the final estimates of their April Manufacturing PMIs. European figures were encouraging, as the German index was confirmed at 42.5, while the Eurozone one hit 45.7, both above the previous estimates. In the US, the Goods and Services Trade Balance posted a deficit of $69.4 billion in March, worse than anticipated. Initial Jobless Claims declined to 208K in the week ending April 26, beating the 212K expected. Finally, Nonfarm Productivity in the first quarter of the year rose a modest 0.3%, while Unit Labor Cost in the same period was up 4.7%, higher than the 3.6% forecast.

EUR/USD short-term technical outlook

The USD remains on the back foot against most major rivals,  with EUR/USD hovering around 1.0700 ahead of Wall Street’s opening. The daily chart offers a neutral picture, although the risk skews to the downside. The pair is still battling to recover above a bearish 20 Simple Moving Average (SMA) to no avail. At the same time, the 100 and 200 SMAs gain downward traction far above the longer ones. Finally, the Momentum indicator aims higher within neutral levels, while the Relative Strength Index (RSI) indicator suggests limited buying interest, consolidating at around 45.

The 4-hour chart shows bears are gaining strength. Technical indicators turned lower, although within neutral levels. At the same time, the pair is pressuring a flat 20 SMA while the 100 SMA heads south a few pips below the shorter one. A break through 1.0645 should anticipate a steeper decline, with eyes on a break below 1.0600, the year´s low.

Support levels: 1.0645 1.0600 1.0565

Resistance levels: 1.0740 1.0785 1.0810

Foreign exchange analysts at MUFG expect central bank interest rate decisions will dominate the Pound to Dollar exchange rate (GBP/USD) outlook.

Despite the possibility of an early Bank of England (BoE) interest rate cut, MUFG considers that pessimism over US interest rate cuts is now overdone and is sees scope for GBP/USD to strengthen to 1.2950 at the end of 2024.

GBP/USD dipped to 5-month lows just above 1.23 in April before a recovery to 1.2530.

MUFG notes increased evidence of divisions within the BoE Monetary Policy Committee (MPC) with Governor Bailey and Deputy Governor Ramsden more confident that inflation will decline to target, but chief economist Pill less confident.

At this stage, MUFG is still backing a first rate cut in June, although it would be no surprise if the move is delayed until August.

As far as US interest rates are concerned, markets are now pricing in only one rate cut this year and expect that the BoE will cut rates ahead of the Fed.

MUFG considers that the shift in US expectations has gone too far, and it still sees the potential for three rate cuts this year.

The bank also sees very little scope for a further increase in US bond yields from current levels, limiting the scope for further dollar buying.

KEY QUOTES:

“The pound weakened versus the US dollar but was close to unchanged versus the euro highlighting the influence of the US dollar…”
“The BoE rate cut expectations continue to remain between less being done by the Fed and more being done by the ECB.”

“We are maintaining our view of the BoE cutting rates in June although admittedly the risk is certainly skewed in favour of a hold…”

“However, comments from Governor Bailey and Deputy Governor Ramsden suggest both could potentially vote in favour of a cut by then.”

“Incoming economic data going forward is likely to send mixed signals in terms of the timing of a rate cut.”

“Compared to a month ago we hold more conviction that the US yield curve has moved too excessively away from pricing cuts…”

“We assume therefore that there will be limited divergence between the UK and the euro-zone and forecast a relatively flat profile…”

“While a June cut would be a close call, the drop in annual CPI to below 2.0% coupled with confidence of slowing wages as employment growth slows, we see it as more likely that the MPC votes to cut in June.”

• There is a high chance that Japanese authorities intervened again to support the yen.

• Powell maintained that the Fed was still looking to cut interest rates.

• The gap in long-term government bond yields between Japan and the US is 376 basis points.

The USD/JPY forecast indicates a bearish trend as the yen gains ground following speculation of another Bank of Japan intervention. Meanwhile, the dollar weakened as Fed Chair Powell’s tone was less hawkish than anticipated.

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The yen had another sharp increase on Wednesday night, leading to a significant decline in the USD/JPY pair. There is a high chance that Japanese authorities intervened again to support their currency. However, they refused to comment on this.

Furthermore, the BoJ intervention had a more significant impact since it came when the dollar was weak. Notably, the Fed maintained rates and signaled a delay in rate cuts due to the recent higher-than-expected inflation figures. However, Powell maintained that the central bank was still looking to cut interest rates. This eliminated any fears in the market that the central bank would indicate possible rate hikes. 

However, despite the recent strength in the yen, fundamentals still point to future declines. Notably, the gap in long-term government bond yields between Japan and the US is 376 basis points. As long as this gap remains wide, there will always be a reason to sell the yen and buy the dollar. However, the Bank of Japan is now focused on $160.00 as its line in the sand, making it a strong resistance. 

Meanwhile, mixed reports from the US showed a bigger-than-expected increase in employment and a drop in job vacancies. Investors are now waiting for Friday’s NFP report.

USD/JPY key events today

USD/JPY technical forecast: Bears take control after a surge in momentum

On the technical side, the USD/JPY price has broken below the 30-SMA, indicating a shift in sentiment to bearish. The first indication of bearish strength came when the price made a bearish engulfing candle at the 160.00 key level. 

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The decline paused at the 30-SMA, where bulls attempted to resume the uptrend. However, they found resistance at the 158.00 key level. This resistance allowed bears to breach the 30-SMA support barrier and retest the 154.01 support level. With this new sentiment, the price trades in a bearish channel. Therefore, the decline will likely continue with the next target at 151.01.

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GBP/JPY Forecast Video for 11.05.23

British Pound vs Japanese Yen Technical Analysis

The British pound has initially tried to rally during the trading session on Wednesday but gave back some of the gains as we continue to see a lot of choppy consolidation. The ¥170 level is a large, round, psychologically significant figure, and therefore attracts a lot of attention, and it is offering short-term support underneath. At this point, I think it’s probably only a matter of time before the market continues to figure out what it wants to do, and in the meantime, it will be very noisy. Ultimately, this is a market that has seen a lot of momentum thrown into it, and that does make a certain amount of sense considering that the Bank of Japan has done everything it can to keep interest rates down, meaning that they are printing yen. By contrast, the Bank of England is very tight with its monetary policy, so it does make a certain amount of sense at this market has continued to see buyers.

Short-term pullbacks continue to be buying opportunities from what I can see, with the ¥168 level underneath being a major support level. The 50-Day EMA sits right around the ¥166 level and is rising. All things being equal, this is a market that I think is very noisy, but still favors the upside overall. I don’t have any interest in shorting this market, as it has been so bullish for so long. All things being equal, this is a market that I think continues to see a lot of volatility, but that’s nothing new for this pair.

Make sure that you keep your position size reasonable, with the reality being that this is an extraordinarily volatile pair under the best of circumstances, and at this juncture it’s likely that we will continue to see a lot of questions asked of risk appetite. Because of this, you need to be cautious, but it’s clearly a market that still has more upward pressure than down, so that’s the way you need to approach it. If we can break above the ¥172.50 level, this pair could take off to reach the ¥175 level.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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