EUR/USD Flattens Out, EUR/JPY Rise in Jeopardy at Intervention Levels

Euro (EUR/USD, EUR/JPY) Analysis

EUR/USD trending lower for 4th straight week; weekly outlook neutral

The euro endured a difficult week and eventually fell back on track to end the week. The currency pair plunged after an unscheduled windfall tax on Italian banks was announced on Tuesday. Prices rebounded the next day after the Italian president reassured that taxes would remain below 0.1% of total bank assets. US inflation then picked up slightly, which the market seemed happy with, but after a day of volatility, it was largely flat on the day.

The coming week will see a notable decline in terms of high-impact risk events, with the only standout being economic sentiment in the EU and German ZEW. Final inflation data for July and the second estimate of Q2 GDP are unlikely to move significantly unless the data differ significantly from prior measurements.

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On the daily chart, the price is open to trading between 1.1012 and 1.0910 next week. With U.S. and European inflation largely heading in the right direction and central banks in both regions reaching or very close to their final interest rates, there are fewer obvious drivers for both currencies.

EUR/USD daily chart

Source: TradingView, Author Richard Snow

The weekly chart shows a long-term uptrend that has played out in a rather volatile fashion, currently heading down but stalling at the 1.0930 level. If the bearish move continues, the next level to watch is 1.0833 (corresponding to the weekly lows of late June and early July).

Weekly EUR/USD Chart

Source: TradingView, created by Richard Snow

While the market is unanimous that the ECB will pause rate hikes in September, it is still pricing in the possibility of another 25 basis points hike by the end of the year. A poll of economists conducted by Reuters found that only a majority of economists (53%) agreed with that view. Stubborn July core inflation in the EU complicates the picture, but worsening economic data (manufacturing PMI and growth slowdown in Germany and the EU, despite a marginal improvement in Q2 GDP) , weighing on the ECB’s hawkish resolve.

Market Suggested Interest Rate Expectations

Source: Refinitiv, author Richard Snow

EUR/JPY hits new year-to-date highs as yen depreciation hits ‘intervention territory’: bearish outlook for the week

Despite little support for the euro, the EUR/JPY broke above previous resistance levels with relative ease on Thursday and held similar levels heading into the weekend. The move was more the result of a weaker yen than a stronger euro, after Bank of Japan officials were quick to admit that there were dovish rather than hawkish intentions behind the recent yield curve adjustment. Ta. At the same time, interest rate spreads are still wide and carry trades continue.

Given that USD/JPY is at $145, it will be difficult to pick up further bullish momentum from here. This is the level at which Japanese officials have voiced their displeasure and previously intervened in the foreign exchange market to strengthen the currency. With Japan’s GDP and inflation announcements due next week, interest in the currency pair will increase at the beginning and end of the week.

EUR/JPY daily chart

Source: TradingView, Author Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @Richard Snow