EUR/USD AND EUR/JPY FORECAST
- EUR/USD will exhibit heightened sensitivity to the FOMC monetary policy announcement next week
- The Fed is expected to hold interest rates steady, but may signal one more hike for this year, creating a constructive backdrop for the U.S. dollar
- Elsewhere, EUR/JPY appears to be carving out a falling wedge, a technical pattern that can have bullish implication for the underlying asset once confirmed
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EUR/USD OUTLOOK
EUR/USD lost ground over the last five trading sessions, falling for the ninth straight week to one of its lowest levels since late May.
The euro's downturn accelerated on Thursday following the European Central Bank’s monetary policy announcement. The ECB delivered its 10th consecutive interest rate hike, but signaled that its tightening campaign has ended by recognizing that it has “made sufficient contributions, under the current assessment, to returning inflation to target in a timely manner.”
With markets deeming that the ECB policy rate has topped out, there may be room for EUR/USD to fall further, especially if the Fed takes a divergent approach and suggests more work is required to restore price stability.
We'll gain deeper insights into the FOMC's thinking next week when it announces its September monetary policy decision. The institution is expected to keep borrowing costs unchanged at their current range of 5.25% to 5.50%, but could forecast another hike for this year and signal higher interest rates for longer in the dot plot.
The Fed has been burned several times by false dawns of disinflation, so it will be reluctant to declare victory prematurely and endanger the progress made on the inflation front thus far. This means that policymakers are likely to retain a bias toward a more restrictive stance, creating a bullish backdrop for the U.S. dollar against the euro in the near term.
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EUR/USD TECHNICAL ANALYSIS
After the recent retrenchment, EUR/USD is currently perching above the 38.2% Fibonacci retracement of the September 2022/July 2023 rally at 1.0610. While this area of high technical importance may act as a strong line of defense against additional declines, a breakdown could unleash significant selling pressure, setting the stage for a move toward the psychological 1.0500 level.
In the event of a bullish turnaround, initial resistance zone spans from 1.0760 to 1.0785. Clearing this barrier successfully might pave the way for additional upward momentum, with the subsequent target resting around the 200-day simple moving average at 1.0840. On further strength, the focus shifts to 1.1025.
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EUR/USD TECHNICAL CHART
EUR/USD Chart Prepared Using TradingView
EUR/JPY TECHNICAL ANALYSIS
EUR/JPY has been trading inside the confines of what seems to be a falling wedge, a bullish technical pattern formed by two converging downward sloping trendlines that connect a series of lower highs and lower lows.
Confirmation of this configuration materializes when prices successfully breach the upper trendline, a pivotal resistance zone. In the case of EUR/JPY, this crucial area rests at 158.00, representing a make-or-break point for the pair's future trajectory.
Should the bullish scenario come to fruition, we could see a rally towards 159.90. Beyond this level, the spotlight shifts to channel resistance situated around the 161.00 handle at the time of writing.
In the event of a setback, support lies at 156.50. If this floor is taken out, the market bias would turn negative in the short term, paving the way for a possible move toward 153.50, followed by 151.85, as shown in the daily chart below.
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| Change in | Longs | Shorts | OI |
| Daily | 6% | -2% | -1% |
| Weekly | -1% | -5% | -4% |
EUR/JPY TECHNICAL CHART
