EUR/USD, USD/JPY Forecast: Two trades to watch

EUR/USD slips as USD strengthens ahead of Eurozone inflation

EUR/USD is trading below 1.16 as the euro comes under pressure from a stronger U.S. dollar, weaker German retail sales and rising oil prices ahead of Eurozone inflation data.

German retail sales fell 3.4% in July, their sharpest decline in more than four years, compared with expectations for a 0.4% increase. The data raises fresh questions over the strength of the German consumer and comes at an awkward time for the ECB, with inflation expected to accelerate to 3.3% in August from 2.9%.

A hotter inflation reading would strengthen the case for an ECB rate hike this month, although there is a risk that higher oil prices become more of a problem for growth than a reason for tighter policy. Brent has risen back above $90 a barrel, up more than 6% from last week's lows, as tensions between the U.S. and Iran escalate.

That leaves the euro caught between higher inflation supporting the ECB and weaker growth weighing on the economy.

The dollar, meanwhile, is benefiting from higher Treasury yields and the more hawkish tone from Fed Chair Kevin Warsh at Jackson Hole. Markets are now pricing in around a 65% probability of a September rate hike, up sharply from last week.

The Middle East tensions are also supporting the dollar through safe-haven demand, while higher oil prices add to U.S. inflation concerns.

The next major test will be Friday's Non-Farm Payrolls. After July's 23,000 job losses, the bar for a rebound is relatively low. A stronger-than-expected report could reinforce September hike expectations and give the dollar another leg higher.

EUR/USD forecast – technical analysis

EUR/USD remains below the 1.17 resistance area after its recovery from the 1.1350 low ran into the falling trend line. The price is still above the 50 and 200 EMAs, so the broader structure remains constructive, although the recent lower highs suggest momentum has weakened.

A move back above 1.1650 and then 1.17 would create a higher high and strengthen the bullish outlook, opening the way towards 1.18 and 1.1850.

On the downside, a break below the 200 EMA around 1.1565 and 50 EMA around 1.1550 would weaken the structure and bring 1.15 into focus, followed by 1.1350.

USD/JPY rises towards 160 as Japanese yields hit 30-year high

USD/JPY is approaching the key 160 level as the yen weakens despite Japanese 10-year yields rising to 3%, their highest level since 1996.

The rise in Japanese yields would normally provide some support for the yen, but the dollar's broader strength is currently outweighing that effect.

U.S. Treasury Secretary Scott Bessent has also been pushing for a stronger yen, arguing that Japan and the BOJ need to take action. Japan and the U.S. have agreed to continue coordinating on orderly currency movements, increasing attention on the risk of intervention if USD/JPY moves significantly above 160.

The key issue is whether the BOJ actually follows through with a rate hike. Markets are increasingly expecting a September move, with reports suggesting pressure is building on Governor Ueda to tighten policy further.

For now, however, the rate differential remains supportive of USD/JPY. Higher U.S. yields, stronger oil prices and the Fed's hawkish shift are all working against the yen.

Friday's U.S. payrolls could therefore be particularly important. A strong report would reinforce the case for higher U.S. rates, while a weak number could take some pressure off the yen.

USD/JPY forecast – technical analysis

USD/JPY is testing the 160 resistance zone, where the 50 EMA, rising trend line and 61.8% Fibonacci retracement of the 163.90 high to 155 low converge.

A decisive break above 160 would strengthen the bullish setup and bring 162.75 into focus, followed by 164.

On the downside, 159.50 is the first support, followed by 158.55 and the 200 EMA around 158. A break below 158 would weaken the recovery and bring 157.25 and 155 back into focus.