EUR/USD, USD/JPY Forecast: Fed Hike Bets Ease, Yen Weakness Does Not

• US inflation surprises remain subdued versus history
• Fed rate hike pricing has eased through August
• EUR/USD grinds higher within ascending channel
• USD/JPY coils beneath 159.37 resistance

For all the talk about today’s US inflation report, it is debatable whether anyone truly has a consistent edge in predicting how the data will print, let alone how markets will respond over a longer time frame. Looking at price action across major currency pairs heading into the release and identifying the technical levels that matter provides a framework as good as any for anticipating or reacting once it comes out.

No Repeat of 2022

Relative to the supply shock-driven inflation surge coming out of the pandemic and Ukraine war, the inflationary impact from the latest bout of energy price strength has so far been far less significant. Despite disruptions to energy supplies coming out of the Gulf, Citi’s US Inflation Surprise Index shows that, over recent years, inflation prints have by and large either met or undershot expectations.

The index measures whether inflation data is coming in above, in line with, or below market expectations, with readings above zero signalling upside surprises and readings below zero indicating downside surprises.

Source: LSEG, FOREX.com

Of course, that trend does not eliminate the risk of an upside surprise today. But it does suggest the recent skew has been towards inflation meeting or undershooting expectations rather than exceeding them.

Based on forecasts compiled by the Wall Street Journal, monthly estimates for headline CPI range from 0% to 0.16%, centred around a median of 0.12%. For core, the range is 0.16% to 0.26%, with the median at 0.22%. That leaves the hurdle for an upside surprise relatively low.

Importantly, it will not just be the headline figures that matter. Traders will be looking for evidence that inflationary pressures are becoming more entrenched in core services excluding housing, which would provide a read on domestically generated price pressures and labour market conditions. Core goods prices will also be important in assessing whether tariff pass-through is largely complete.

Those components will help shape expectations for the PCE inflation report later this month, with PPI due Thursday providing another piece of the puzzle.

Fed Hike Bets Retreat

Source: TradingView

Despite the re-emergence of energy-led inflationary pressures, market pricing for Fed rate hikes out to the June meeting next year has been edging lower in August. According to Fed funds futures, around 44 basis points of tightening is priced over this period, with the September meeting effectively deemed a coin flip.

Back in late July, around 62 basis points of hikes were priced over the same period. But a run of relatively tepid US economic data, following a series of strong beats earlier this year, including an underwhelming payrolls report last Friday, has curtailed hawkish pricing.

Euro Retains Its Bid

Source: TradingView

Looking at EUR/USD, we have seen a series of bullish breakouts over recent weeks. The first came from a minor downtrend in the wake of the Fed meeting two weeks ago. Then came the joint intervention by the US Treasury and Japan’s Ministry of Finance, which saw the pair bounce strongly from beneath former resistance around 1.1480, where the 50-day simple moving average was also located.

Since then, the price has settled into a grind within an ascending channel, breaking above downtrend resistance in place from the highs set earlier this year. That slowdown in the bullish move has coincided with renewed energy price strength, with the Gulf effectively shut as geopolitical tensions between Iran and the United States escalate again. Even so, it has not been enough to derail the euro yet.

The pair continues to attract bids within the ascending channel that formed from the 23.6% Fibonacci retracement of the January to June bear move, leaving the near-term options clear cut.

While the structure holds, longs can be considered on dips towards the lower end of the channel, targeting a retest of the 100-day simple moving average, which capped the pair late last week, followed by the upper end of the structure. Beyond that, the 38.2% Fibonacci retracement at 1.1614 comes into view, with the 200-day simple moving average at 1.1627 not far above and now flatlining.

On the downside, a break of the lower end of the ascending channel would bring the 23.6% Fib back into focus. Beneath that, 1.1480 is the next level of note, having previously acted as resistance, followed by the 50-day simple moving average.

Longs are marginally favoured over shorts, with the oscillators still siding with bulls even though upside momentum is no longer strengthening. RSI 14 remains above the neutral 50 level at around 60, while MACD has staged a bullish crossover and moved into positive territory, although it too is flattening out.

While upside momentum is no longer building, the broader technical picture suggests retaining a modest bullish bias may be more advantageous than turning bearish.

Yen Weakness Refuses to Fade

Source: TradingView

As correctly flagged in my weekend USD/JPY note, upside risk in the pair has played out so far this week. Importantly, that has occurred despite both the soft US payrolls report and a further pullback in Fed hike pricing, reinforcing the point that yen weakness is broader and more structural than simply a US rates story.

Following the push above last week’s high, USD/JPY finds itself coiling in what resembles an ascending triangle on the four-hourly chart on the left. Gains have been capped around 159.37, while dips continue to be bought at progressively higher levels. The structure has not been in place for an extended period, but it still warns of the potential for an eventual topside break and continuation of the rebound seen so far in August.

On the upside, the first levels of note are the 100-day simple moving average on the daily chart on the right, followed by 160.73, the former record high hit in late April. That level has flipped between support and resistance on subsequent tests, leaving it as an obvious reference point if the rebound extends.

On the downside, the gradually rising trendline visible on the four-hourly chart runs from the Liberation Day lows in April last year. Even though it was broken convincingly during the latest intervention episode, the price respected it earlier this week, suggesting it remains relevant. It kicks in today around 159.00.

Beneath that, 158.58, last week’s high, is the next level of note, followed by 157.95, which has acted as both support and resistance since the intervention episode.

The oscillators are mildly bullish, even though upside momentum is no longer building. RSI 14 is flatlining above the neutral 50 level at around 61, while MACD staged a bullish crossover earlier this month and has since moved into positive territory, although it is now converging back towards the signal line. Overall, the setup still favours retaining a bullish bias on the four-hourly timeframe.