EUR/USD, USD/JPY Forecast: Two trades to watch

EUR/USD rises towards 1.07, but ECB outlook and political jitters could limit gains

• ECB’s Olli Rehn deemed two more rate cuts in 2024 appropriate
• Eurozone economic sentiment data is due
• EUR/USD tests 1.07 resistance

EUR/USD is edging higher from a six-week low, but the recovery looks unconvincing.

The pair has been pressurized on diverging ECB-Fed expectations and political uncertainty ahead of Sunday’s elections in France.

ECB governing council member Olli Rehn said that two more rate cuts this year seemed appropriate, in contrast to the Federal Reserve, which may only cut rates once, if at all. Recent Fed speakers have adopted a more hawkish tone, raising doubts about the Fed’s next move.

The eurozone economic calendar is relatively quiet, with just eurozone economic sentiment due, which is expected to tick higher to 96.2 from 96. However, the data comes following a series of disappointing numbers from Germany, the eurozone's largest economy, where consumer confidence and business morale deteriorated, suggesting the recovery could be stagnating.

Any gains in the euro will likely be limited by political uncertainty ahead of the first race stage of the French elections on Sunday. Caution of possible political upheaval and higher spending plans from a new government will likely prevent any meaningful move higher in the common currency.

Meanwhile, the US dollar is edging away from a 2-month high against its major pairs reached yesterday; the dollar has been supported by hawkish Fed commentary ahead of inflation data tomorrow, which could provide more clues over the timing of the first Fed rate cut.

US GDP durable goods and Douglas claims data are due today.

EUR/USD forecast – technical analysis

EUR/USD trades within a descending channel. The pair once again found support at 1.0670 and is testing resistance at 1.07, although the move higher lacks conviction.

Sellers will look to take out 1.0660 to bring 1.06 into play.

Any recovery will need to rise above the falling trendline resistance at 1.0740 to expose the 200 SMA at 1.0785.

USD/JPY  eases from a 38-year high, but intervention threat remains

• Japanese retail sales have lifted the yen
• US jobless claims. GDP & durable goods orders are in focus
• USD/JPY falls below 160.50

USD/JPY has eased back from a 38-year high after stronger-than-expected Japanese retail sales and further verbal intervention from Japanese authorities overnight

While the pair pulled away from 169.90, yesterday’s high and a level last seen in 1986, the uptrend is still intact.

The pair has been boosted by yen weakness following disappointment from the Bank of Japan, which has been reluctant to come forward with plans for reducing bond purchases. In contrast, Federal Reserve officials have sounded hawkish, showing that the Fed is in no rush to start cutting interest rates.

Attention will turn to a US data drop this afternoon, with US Q1 GDP, durable goods orders, and jobless claims due ahead of tomorrow's core PCE inflation.

Q1 GDP is the third estimate, so it's unlikely to be market-moving. Instead, attention will be on jobless claims for any signs of a weakening in the labour market after initial claims rose to a nine-month high a few weeks earlier.

Signs of weakness in the US economy could help pull the USD lower, but big moves are unlikely ahead of tomorrow's inflation data.

USD/JPY forecast - technical analysis

USD/JPY has broken above 160.00 resistance, rising to a high of 160.90 before easing back. The pair has blue skies above, with 161.00 and 162.00 the following levels. This has turned into a psychological play rather than a technical one.

Support can be seen at 160.00 and below here, 158.75, the weekly low. However, intervention could spark a significant move and take out these levels quickly, back towards 158.00, the May high or even 155.00.