EUR/USD Continues to Slide as EUR/JPY Retreats from YTD High, What Next?

EUR/USD, EUR/JPY PRICE FORECAST:

MOST READ: Dollar Index (DXY) Eyes Acceptance Above 100-Day MA, USD/CHF Ticks Higher

EUR/USD has been on a steady decline since printing a fresh YTD high on July 18 around the 1.1275 mark. Yesterday saw an attempted push above the psychological 1.1000 come under heavy selling pressure pushing the pair toward the 1.0900-mark thanks in large part to a resurgent US Dollar. We can see from the currency strength chart below the Dollar has started the morning on the front foot with final PMI numbers due from the Euro Area.

Currency Strength Chart: Strongest – USD, Weakest – CHF

Source: FInancialJuice

The US Dollar in particular seems to be benefitting at resent from risk-off sentiment thanks to a downgrade in the US by Fitch Ratings Agency. The rally in the dollar is surprising nonetheless given the downgrade and continues a trend in 2023 where theoretical scenarios haven’t always come to fruition. It is important to note however that following a downgrade in 2011 by S&P the DXY enjoyed a significant rally in the months that followed. Is history about to repeat itself?

EURO AREA PMI DATA

A mixed bag for the Euro Area in terms of data this morning. The slowdown in business activity which was seen in manufacturing PMI data as Services PMI underwhelmed coming in below estimates. HCOB’s final Composite Purchasing Managers’ Index (PMI), compiled by S&P Global which is seen as a gauge of overall economic health hit an 8-month low coming in at 48.6. The rare positive out of today’s data came from the composite input and output price index which came in at 53.1 from 53.8 previously, and the lowest since early 2021. The European Central Bank (ECB) policymakers will no doubt breathe a sigh of relief on the price pressure front as it faced a difficult task navigating further rate hikes in the face of slowing economy.

RISK EVENTS AHEAD

Looking to the rest of the day and there is some event risk which could impact EURUSD with ISM Services and Jobless Claims data due out from the US. Yesterday’s ADP employment change data yesterday smashed estimates and gave the US Dollar further impetus and pushing EURUSD lower. ISM Services and jobless claims data later today could push EURUSD lower should it beat estimates and continue the trend of positive data from the US.

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Looking at EURUSD from a technical perspective and we may be setting up for a retracement back toward the 1.1000 psychological level. Price is currently resting on a key area of dynamic support with the 50 and 100-day MA resting at 1.09300 and 1.09150 respectively.

Immediate resistance rests shy of the psychological 1.1000 level at around the 1.0975 handle and could prove a tough nut to crack. The 1.0840 swing low continues to hold and keeps the bullish trend alive. If we are to break below the current area of support a daily candle close below the 1.0840 handle would see a change of structure and thus could open up the possibility of further downside.

EUR/USD Daily Chart – August 3, 2023

Source: TradingView

EURJPY OUTLOOK AND BOJ POLICY

EURJPY is interesting particularly after the surprise announcement by the Bank of Japan (BoJ) last week in tweaking the Yield Curve Control policy. This initially helped the Yen but weakness has returned with EURJPY retesting the YTD high yesterday.

A break higher and fresh YTD highs is not out of the question but could be short lived as the cloud of FX intervention continues to hover around the Yen. The BoJ have continuously said they will act only if excessive moves occur, however I would take that with a pinch of salt. Given that the BoJ continuously sad they see no need to tweak the YCC policy before springing a surprise, could we see a similar story regarding FX intervention.

EUR/JPY Daily Chart – August 3, 2023

Source: TradingView

Overall structure and price action hints at a new leg to the downside, but the fundamental factors have largely overshadowed the technical outlook. The recent down move however did give a sign with a double to pattern as you can see on the chart above but was helped by the BoJ tweaking the YCC policy.

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IG CLIENT SENTIMENT DATA

IGCS shows retail traders are currently SHORT on EUR/JPY, with 81% of traders currently holding SHORT positions. At DailyFX we typically take a contrarian view to crowd sentiment, and the fact that traders are short suggests that EUR/JPY may enjoy a short pullback before continuing to higher toward fresh YTD highs and maybe something to keep in mind.

Written by: Zain Vawda, Market Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda