EUR/USD, USD/JPY Outlook: Two Trades to Watch

EUR/USD holds steady as PPI cools

• German PPI falls -1.4% MoM
• A growing division in the ECB is appearing
• EUR/USD resistance at 1.0970

EUR/USD is holding steady above 1.09 after modest losses in the previous session and as investors digest the latest German wholesale inflation data.

German wholesale prices fell by a larger-than-expected -1.4% MoM in May after rising by 0.3% in April. Expectations had been for a 0.7% decline. On an annual basis, producer prices raised 1% year on year, down from 4.1%.

To support the view that inflation in the eurozone’s largest economy is cooling at a faster pace than expected, which raises questions over the future path of interest rates beyond July.

The ECB raised interest rates by 25 bps last week and pointed to another rate hike next month; however, whether the central bank will hike again in September is unclear.

Great divisions within the ECB are becoming apparent. ECB chief economist pushed back on expectations of a September hike. However, other policymakers favour a more hawkish approach. Isabel Schnabel said this is not the time to be complacent.

Looking ahead, ECB Executive Board members Andrea Enria and Luis de Guindos are due to speak today. Hawkish comments could lift the euro.

Meanwhile, the USD is edging higher on safe-haven demand after the PBoC cut its primary loan rate by 10 basis points, as expected. Concerns over the health of the economic recovery in China continue to plague the markets.

US housing starts data will be in focus later today ahead of Powell’s testimony before Congress tomorrow.

EUR/USD outlook – technical analysis

EURUSD enjoyed a strong rally last week, running into resistance at 1.0970, which is the level that bulls need to take out in order to extend the bullish run towards 1.10. The RSI supports further upside.

Conversely, immediate support can be seen at 1.0910, the weekly low, and 1.0885, the 50 sma. A break below 1.08, the 100 sma, is needed to negate the near-term uptrend, which could open the door to 1.0760, the 20 sma.

USD/JPY eases back from a new 7-month high

• JPY rises on safe-haven flows amid concerns over China’s economic recover
• US housing starts are due ahead of Fed Chair Powell tomorrow
• USD/JPY eases from 142.25 a 7-month high

USD/JPY is easing back from a 7-month high of 14225 reached in the Asian session to just below 142.00 at the time of writing.

The Japanese yen is benefitting from safe-haven flows amid ongoing concerns over the strength of the economic recovery in China and is finding a boost from more robust than-expected Japanese industrial production.

Industrial output rose 0.7% MoM in April, defying expectations of a -0.4% decline.

At these lofty levels, the market could be starting to speculate over intervention from Japanese authorities to support the yen.

The USD is falling versus the yen but trades modestly higher versus its major peers as traders return to their desks after the long Juneteenth weekend.

US housing starts data will be in focus ahead of Federal Reserve Chair Jerome Powell’s testimony before Congress, which begins tomorrow.

The markets will be watching Powell closely for clues over the future path for interest rates after the Fed skipped a June rate hike last week but pointed to a higher peak rate of 5.6% this year.

USD/JPY outlook - technical analysis

USD/JPY continues to trade with an almost 2-month ascending channel, testing resistance at 142.25, the November 21^st, 2022, high. Buyers will need to rise above here to extend the bullish run to the 143.00 round number and the rising trend line resistance of the rising channel.

However, it is worth noting that the bearish RSI divergence which could suggest that the run higher is running out of steam.

Support can be seen at 140.70, the May high, 140.25, the 20 sma, and 140.00, the psychological level. Below here, the June low of 138.45 comes into focus.