EUR/USD, EUR/GBP and EUR/JPY Setups

EUR/USD, EUR/GBP, EUR/JPY Setups

ECB Officials Provide a Hawkish Boost for the Euro

Top central bankers from the world’s largest central banks are arriving in Sintra Portugal for the ECB’s Forum on Central Banking. The annual event culminates in a highly anticipated panel discussion tomorrow, which will include heads of the Fed, Bank of Japan, Bank of England as well as the ECB president. Usually, markets pay attention when any one of the above-mentioned central bank heads make an appearance and tomorrow, they will share the same stage.

This morning Martins Kazaks, who leans more hawkish, expressed that he sees interest rates raising after July and emphatically rejected market expectations of rate cuts in 2024. ECB President Christine Lagarde continued with the hawkish rhetoric, echoing that rates will need to remain at restrictive levels for as long as is necessary. She also left the door open for higher interest rates than is currently expected, saying that it is unlikely in the near future that the ECB will be able to state with full confidence that a peak in rates has been reached.

EUR/USD: Attempting a Bullish Continuation

EUR/USD remains particularly sensitive to Fed and ECB comments after Jerome Powell’s hawkish testimony last week convinced markets to price in a greater probability of rate hikes in 2H, that ultimately saw the pair ease lower.

However, a sizeable rejection of lower prices late on Friday, provided an extended lower wick on the daily chart – providing an early clue as to how price action was likely to get under way this week. While the MACD suggests bullish momentum remains in play, longer-term drivers of euro strength appear few and far between. Fundamental data in Europe is worsening with Germany already in a technical recession – experiencing a contraction in all important manufacturing sector. 1.0965 offers a short-term test of the longevity of today’s move higher, with the recent swing high of 1.1012 potentially capping upside gains for now. Support moves to 1.0910 should we close above this level on the daily candle, which appears likely.

As we enter what appears to be the final stages of the rate hiking cycle, markets are becoming even more sensitive to news flow meaning that counter-trend moves and choppy price action could provide the opportunity for more range-bound opportunities. EUR/USD upside will also be influenced by month and quarter-end rebalancing flows.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

EUR/GBP: The UK’s Inflation Problem Boosts ST Yields, Potentially Limiting Euro Gains

After last week’s surprise 50 bps hike, UK bond markets have pushed yields higher, with the 3-month gilt well above 5% – exacerbating the inverted yield curve. EUR/GBP now appears to be entering a consolidatory phase, although daily moves are still fairly volatile, presenting a rather wide channel that has contained recent swings.

EUR/GBP bullish continuation may find resistance at 0.8635 – the upper side of the broad range while immediate support appears at 0.8565, followed by the lower bound of the range, 0.8515. The MACD sees momentum favoring upside continuation but the true test for bulls remains 0.8635. Another test for EUR/GBP bulls will be the declining yield differential between German bund and UK Gilt yields – which increasingly favors UK bonds over the shorter term.

EUR/GBP Daily Chart

Source: TradingView, prepared by Richard Snow

EUR/JPY: BoJ Minutes Reaffirm Little Chance of Policy Changes Anytime Soon

In the minutes of the April BoJ meeting, inflation was seen coming down in the second half of this year while officials desired more to be done on the side of nominal wage growth, if they are going to entertain even the smallest adjustment in monetary policy. In a world where all other major central banks are hiking into the final stages of the tightening cycle, the Japanese yen remains well within the crosshairs.

The yen has depreciated substantially across G10 currencies, leading to outsized moves with little indication of a notable pullback. In fact, EUR/JPY has advanced to such a degree that the monthly chart has to be used to identify relevant levels of support and resistance. A weaker yen helps make Japanese exports more attractive for foreign buyers but starts to become problematic in the face of sticky inflation – something that Japan is experiencing although to a lesser degree than other major economies. While other major currencies oscillate on news flows, the yen trade appears one-sided. In the absence of intervention talk from Japanese officials, markets appear to keep testing levels to the upside with 162.40 next up, followed by the psychological level of 170 which last appeared back in 2008. Support at 148.45 but the market has moved well above here.

EUR/JPY Monthly Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX