EUR/USD, USD/JPY Forecast: Two trades to watch
EUR/USD rises from 17-month low but French fiscal and political concerns linger
The euro/U.S. dollar is recovering from a fresh 17-month low near 1.1150 and hovers just above 1.12 at the time of writing, although the broader bearish structure remains.
French fiscal and political concerns could continue to weigh on the euro. President Emmanuel Macron's government is anxious to pass a budget before the end of the year as it seeks to reassure markets that France can bring down its debt mountain. However, in political jostling ahead of next year's presidential election, opposition parties oppose the government's proposals.
The 10-year yield has risen as high as 4.5% in recent days, but the finance minister insists that France has not yet caught an adverse snowball effect. However, surging costs could spiral into a full-blown debt crisis if action isn't taken soon.
Budget talks have started, and the Socialist motion against the budget was denied after failing to pass an initial hurdle. However, France may need to experience more market pressure before significant progress is made.
The ECB is expected to hike rates once more before the end of the year. The Belgian central bank governor has joined the chorus of policymakers saying that the ECB will probably have to hike rates again. His comments come as inflation data is due later this week and is set to approach 4%, well above the ECB's 2% target.
Growth has been surprisingly resilient, given the energy price spike triggered by the conflict in the Middle East. However, ECB President Christine Lagarde has warned that an escalation in the war remains a key risk, and surging bond yields will weigh on activity more than previously expected. Lagarde also noted that elevated euro area inflation, driven by higher prices, is yet to feed into the broader economy.
Should French debt suffer heavier losses, the ECB may be forced to abandon rate hikes, which could see the euro come under more pressure.
The U.S. dollar is trading cautiously just below 18-month highs ahead of U.S. CPI data. Stronger-than-expected data could raise Fed rate hike expectations and lift the U.S. dollar, creating a headwind for EUR/USD.
EUR/USD forecast – technical analysis
The euro/U.S. dollar has extended its move southwards, falling to a fresh 18-month low of 1.1155 before recovering to 1.12 at the time of writing. This has helped bring the RSI out of oversold territory.
Sellers will look to break below 1.1155 to extend the move southwards towards 1.11 and 1.10, the psychological level.
Any recovery first needs to rise above 1.12. Above here, attention turns to 1.13, the 20 EMA, before the 1.1350 resistance zone and the 50 EMA at 1.1410 come into focus.
USD/JPY looks to US CPI data
USD/JPY is struggling to extend yesterday's bounce, with few signs of meaningful traction on Wednesday amid mixed fundamental cues.
The U.S. dollar is broadly flat as investors look cautiously ahead to the release of U.S. inflation data.
U.S. CPI is expected to show that inflation rose by 0.6% month on month in September, up from 0.4% in August. However, core inflation, which excludes more volatile items such as food and fuel, is expected to ease to 0.2%, down from 0.3%. Inflation data will be followed by PPI figures on Thursday and Federal Reserve Chair Kevin Warsh's speech on Friday, where he may provide more clues on the policy outlook.
The market is currently pricing in a 20% probability of a rate hike in October, but still an 85% probability of a hike before the end of the year. New York Fed President John Williams said the Fed would likely need to hike rates before the end of the year. However, he added that he did not see any rate hikes in 2027.
Hotter-than-expected inflation could see the market reprice Fed rate hike expectations higher, boosting U.S. yields and the dollar.
Meanwhile, reports that Bank of Japan officials are leaning against a rare back-to-back interest rate hike are undermining the Japanese yen and acting as a tailwind for the pair.
Bank of Japan Governor Ueda said policymakers would continue to closely monitor bond yields, reiterating that long-term interest rates should be determined by market forces.
The yen is also under pressure amid rising oil prices as hostilities in the Middle East escalate, raising concerns over supply disruption.
USD/JPY forecast – technical analysis
USD/JPY has extended its recovery from the 152.90 low to a peak of 158.75. The price trades above its rising trend line and the 250 EMA, while the RSI is also above 50, keeping buyers hopeful of further upside.
Buyers will look to rise above 159, the September 24 swing high, before attention turns to the 160 resistance zone.
On the downside, immediate support is seen at the 50 EMA at 158.10 and the 200 EMA at 157.70. Below here, attention turns to 157.25 horizontal support, below which sellers could gain traction towards 155.
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