EUR/GBP and EUR/JPY Face Support, EUR/USD to Rise?

Euro Analysis (EUR/USD, EUR/GBP, EUR/JPY)

• ECB officials push back against aggressive interest rate cuts
• EUR/USD (bullish): central banks give EUR/USD a helping hand
• EUR/GBP (neutral): solid rejection at 0.8635 highlights vulnerability
• EUR/JPY (neutral): catalyst required to breach zone of support, BoJ and CPI next

ECB Officials Push Back Against Aggressive Interest Rate Cuts

On Friday ECB officials emerged from the mandatory media blackout period to dispel the growing speculation that the ECB will be forced to cut interest rates a staggering six times next year. This morning French central bank chief Francois Villeroy admitted that the next move should be the lowering of interest rates but first the ECB should “enjoy the view” for the time being as the governing council believes that rates will remain at current levels for a while before considering cuts.

Furthermore, the ECB’s Madis Muller was on the same page as his colleague, stating that markets are a bit optimistic if they foresee rate cuts in the first half of 2024. One reason ECB officials are pushing back against rate cuts is because the latest staff projections point to inflation picking up again over the short-term, something that could see markets reign in the 150 basis points (bps) worth of cuts for next year. Markets currently price in the possibility of a 50 bps hike in April and a lesser chance of a 25 bps hike even earlier, in March.

ECB Rate Expectations Derived from Rates Markets

Source: Refinitiv, prepared by Richard Snow

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Inflation is still too high and next week we shall have the final inflation figure for November for the EU, which is likely to show encouraging progress.

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EUR/USD (Bullish): Central Banks Give EUR/USD a Helping Hand

The combination of a dovish Fed and the ECB sticking to its guns helped spur on the euro this week. The pair attempted to test the late November swing high but fell just short as the week drew to a close on Friday in the wake of some dismal flash PMI figures throughout the eurozone.

Yield differentials are also helping bring about a rise in the pair after Treasury yields fell off at a sharper rate than that witnessed in Germany. The German Bund is often used as a benchmark for EU yields. The chart below shows US yields outpacing those in Germany but the EU-US yield differential has shown a sharp move to the upside in recent days, strengthening EUR/USD before Friday’s pullback.

EUR/USD Daily Chart Compared to the German/US 10-Year Yield Differential (orange line)

Source: TradingView, prepared by Richard Snow

EUR/USD fell short of testing the late November high as disappointing PMI data got Friday off to a tricky start. In the week to come there is little EU centered data apart from the final GDP print for November.

In the week to come, bulls will be keeping an eye on the 200-day simple moving average (SMA), which coincides with the 1.0831 level, as a solid zone of support. Should prices find support ahead of this region, the US focused economic data towards the end of the week could provide another boost for EUR/USD if the trend of softer US inflation is to continue. Resistance remains at 1.1017 – the recent swing high.

Source: TradingView, prepared by Richard Snow

EUR/GBP (Neutral): Solid Rejection at 0.8635 Highlights Vulnerability

The neutral guidance in EUR/GBP is in recognition of the late move to the downside on Friday. The pair has shown respect for both resistance (0.8635) and support at 0.8565. Had we closed the week out just below resistance, the opportunity to fade the move in the coming week would have resented itself. Therefore, the pair appears to be in no man’s land as favourable risk to reward setups appear out of reach. Additionally, sterling may benefit from a superior yield (fewer rate cuts priced in for 2024), limiting EUR.GBP upside.

One way to approach this pair over the next two weeks – in which EUR/USD is expected to exhibit lower volatility into Christmas and new year – is to look for range trading opportunities between 0.8565 and 0.8635. In addition, be aware of potential false breakouts as FX pairs are likely to lack the momentum to follow through on what may look like a new directional move.

EUR/GBP Daily Chart

Source: TradingView, prepared by Richard Snow

EUR/GBP appears to favour range bound setups. Find out how to approach trading ranges while learning about trend trading and breakout strategies below:

EUR/JPY (Neutral): Catalyst Required to Breach Zone of Support, BoJ and CPI Next

EUR/JPY will be one of the closer watched pairs next week as the BoJ is due to announce its latest thoughts on monetary policy before Friday provides us with Japan’s inflation data for November. Yen strength has dissipated in recent days after it was reported that the BoJ is not looking at the December meeting as an opportunity to alter interest rates. The committee is yet to be reassured that inflation and wage growth necessitate a major policy pivot.

I do however anticipate that speculation about the eventual withdrawal from negative rates will build into 2024 and will support a longer-term view of broader yen appreciation. For now, price action appears to be driven by a narrowing in yield differentials and significantly lower oil prices which are providing the yen with a steady tailwind into year end.

The EUR/JPY chart reveals a strong zone of support at the end of the week. The zone of support comprises of the 200 SMA, the 38.2% Fibonacci retracement of the 2023 rise and 153.45 – a prior level of support that acted as a pivot point in the second half of 2023. The neutral tag to this pair for next week is in recognition of the stern support zone which will likely require a massive inflation print to refocus attention on the BoJ once again.

The pair may recover from the near oversold territory it currently occupies at the beginning of the week, with the potential for an upward surprise in Japanese inflation presenting an opportunity for EUR/USD to force another test of the support zone, potentially breaking below it. Resistance at 157.93.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX