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

Article By: ,  Senior Market Analyst
December 4, 2023 8:31 AM

EUR/USD falls with rate cut bets in focus 

  • ECB could cut interest rates early next year 
  • Eurozone Sentix Investor Confidence set to improve to -14.4 
  • EUR/USD tests support around 1.0850 

EUR/USD is falling towards 1.0850 in early trade on Monday amid renewed geopolitical risks and on expectations that the ECB could be the first major central bank to start cutting interest rates next year. 

Last week's cooler-than-expected inflation data, as CPI eased to 2.4% YoY, has market pricing in 125 basis points of rate cuts next year with the first interest rate cut fully priced in for April. 

The main focus this week for the euro will be on GDP data, which is expected to show that the economy contracted in Q3. Cooling inflation and a contracting economy give the ECB justification to adopt a more dovish monetary policy stance. 

Today attention is on the Sentix investor confidence index, which is expected to improve to -14.4, up from -18.6. 

Attention will also be on ECB speakers, including President Christine Lagarde. Any comments about the future path for inflation or the economic outlook could influence the EUR. Christina Lagarde has recently said that the central bank isn't ready to consider cutting borrowing costs now but could in 2024. 

Meanwhile, the US dollar is pushing higher on safe-haven demand but still hovers around the 2.5-month low. The USD weakened versus its major peers in November on bets that the Fed is done hiking rates. 

Attention will turn to US factory order data ahead of nonfarm payrolls later in the week. 

EUR/USD forecast -technical analysis 

EUR/USD has fallen away from the November high of 1.1020 back into the rising channel. The price is finding support on the 20 sma and November 22 low at 1.0850. A break below here exposes the 200 sma at 1.0820. Below here sellers could gain momentum ahead of the next hurdle at 1.0750 the early November high. 

Should the 20 sma hold, buyers will look towards resistance at 1.0960 ahead of the 1.10 psychological level. 

USD/JPY hovers around a 3-month low as geopolitical tensions rise 

  • Safe haven flows after US vessel attacked in the Red Sea 
  • US factory orders expected to fall -2.5% MoM in Oct. 
  • USD/JPY falls to 146.20 a 3-month low 

USD/JPY is falling below 147.00 at its lowest level since early September on growing expectations the Federal Reserve is done with its current monthly policy tightening cycle and could start cutting interest rates next year. 

BoJ board member Asahi Noguchi said that Japan has yet to achieve price growth driven by higher wages and that is premature to consider exiting ultra-loose monetary policy. Tokyo inflation data is due on Tuesday. 

The yen is also finding support from geopolitical developments after an attack on an American warship in the Red Sea on Sunday has fueled fears of an escalating conflict between Israel and Hamas. 

Meanwhile, the US dollar is rising versus its major peers today but continues to trade around a three-month low, as the market shrugged off comments by Federal Reserve Chair Jerome Powell on Friday who said that it was premature to talk about cutting rates. However, he did say that rates were well into restrictive territory. 

The markets are now pricing in a 60% probability of a rate cut in March this was up from 20% just last week. 

Attention now turns to US factory orders, which are expected to fall -2.5% MoM in October after rising 2.8% in September. The data comes after the US manufacturing sector remained subdued in November, with the ISM manufacturing PMI coming in weaker than expected at 46.7, pointing to some signs of weakness in the economy. The employment index dropped to 45.8 from 46.8, providing some clues ahead of Friday's nonfarm payroll. 

USD/JPY forecast – technical analysis 

USD/JPY continues to trend lower, forming a series of lower lows and lower highs, breaking below its 100 sma to a nadir of 146.20. The RSI supports further downside.  

Sellers will look to take out today’s low to extend losses towards 145.00 the June high. 

Any recovery would need to retake the 100 sma at 147.25 and the falling trendline resistance at 148.50. Above here the confluence of the 20 & 50 sma and last week’s high at 149.65 could prove a tough nut to crack. 

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