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US Dollar Forecast: EUR/USD, GBP/USD and USD/JPY Price Action Setups

US Dollar Forecast: EUR/USD, GBP/USD and USD/JPY Price Action Setups

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US Dollar Weekly Forecast: Neutral

  • Technical barriers limit USD upside but the greenback will likely settle into a range in the coming week
  • EUR/USD holds firm despite worsening outlook in Europe
  • GBP/USD frustrated at long-term resistance – declining rate cut odds to support sterling?
  • USD/JPY drifts towards intervention levels again
  • The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Technical Barriers Limit USD Upside Next Week

The neutral outlook for the US Dollar in the week to come stems from longer-term charts revealing major levels of support for the greenback despite the probability we’ll see a continuation in disinflation for January.

With the memory of that massive NFP report for January still fresh in the minds of traders and investors, even a move lower in inflation may struggle to send the dollar lower all week as fundamentally, the US economy is moving along at an admirable pace – adding to concerns that cutting rates too soon may further stimulate the economy and result in price rises in the not-too-distant future.

Traders have already pared rate hike odds of the Fed cutting in March and in early Q2 but the Fed has provided enough evidence that rates will come down this year, and that is likely to limit upside potential for the dollar in the absence of another massive surprise in incoming domestic data. Retail sales is expected to have pulled back in January, as would be expected after the holiday season, and could help to subdue the dollar. Sentiment captured in the University of Michigan Consumer Sentiment Survey has been showing strong signs of improvement. If the report continues to paint a rosy picture, the dollar may experience a late rise into the end of the week, but I am expecting positive and negative effects to more or less balance out this week.

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EUR/USD Holds Firm Despite Worsening Outlook in Europe

Taking a look at the weekly EUR/USD chart, price action tested the 1.0724 level but couldn’t hold near the prior level of support and subsequently retreated. Another test of the level may ensue in the coming week but the bearish fatigue may limit an extended move lower.

The worsening economic outlook and data in Europe appears priced in already. The next move lower in EUR/USD is likely to come from a greater urgency to cut interest rates from ECB officials, something that has been missing. Instead, ECB members have tried their best to downplay any notions that the Bank will be forced into cutting rates before its peers (Fed and Bank of England). ZEW sentiment data on Tuesday is unlikely to shift significantly and may have a limited impact on the euro itself.

EUR/USD Weekly Chart

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Source: TradingView, prepared by Richard Snow

The daily chart provides a more granular look at the market, currently testing channel resistance in what might prove to be a fifth consecutive daily rise. A rather stern zone of resistance around 1.0830/1 awaits the pair should we see it breakout of the ascending channel.

Notable support and resistance for the pair points to a week where EUR/USD may react to incoming data intra-day but fail to follow through with added momentum.

EUR/USD Daily Chart

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Source: TradingView, prepared by Richard Snow

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GBP/USD Frustrated at Longer-Term Resistance – Declining Rate Cut Odds to Support Sterling?

With the Bank of England (BoE) seeing inflation return to target significantly faster than initially forecasted in November, you would be forgiven for thinking markets would position for imminent rate cuts. This has not been the case. Instead, lingering doubts about future progress on inflation within the policy setting committee keep markets guessing. Out of the prior three members who voted for another 25 basis point (bps) hike in December, two remained for the January meeting. Notably, one member voted for a rate cut and the remaining six were happy to keep rates on hold.

The BoE projections also warned that while inflation ought to reach the target in 1H this year, it will remain above the 2% market for an extended period as sticky price pressures are likely to reemerge. Committee members still lack confidence in the inflation data and would prefer to see further progress before cutting the bank rate.

GBP/USD on the weekly chart reveals frustration at the inability to breach above the significant 61.8% Fibonacci retracement of the 2021 to 2021 major decline at 1.2756. The level has been tested over and over and now the pair looks to have retreated, for now.

GBP/USD Weekly Chart

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Source: TradingView, prepared by Richard Snow

GBP/USD threatened to breakdown, unable to extend the move beyond the 200-day simple moving average (SMA) for long. However, the stern channel resistance suggests that apart from further consolidation potential, cable may attempt another move lower in the coming week. The neutral bias favours consolidation and this appears like the base case next week, although, high impact UK data makes a return with employment, inflation and growth data all in one week.

GBP/USD Daily Chart

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Source: TradingView, prepared by Richard Snow

This article covers the three most liquid forex pairs but each has their own nuances that all traders need to be aware of. Find out how to approach trading each of these major pairs below:

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USD/JPY Drifts Towards Intervention Levels Again

USD/JPY edges towards the infamous 150 marker after the Governor and Deputy Governor of the Bank of Japan confirm they are in no hurry to hike interest rates. This week, Deputy Governor Shinichi Uchida and Governor Kazuo Ueda reaffirmed the measured approach from the Board when it comes to the inevitable shift away from negative interest rate policy.

Uchida’s comments are followed closely as he is known for dropping hints around key developments. USD/JPY continues to grind higher as markets distance themselves from notions of imminent rate changes stemming from the BoJ. The 150 marker is near-term resistance, with 146.50 appearing as support. Recent BoJ commentary and the notable lack of concern around the weakening yen opens the door for another test of 150.

USD/JPY Daily Chart

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Source: TradingView, prepared by Richard Snow

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--- Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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