Upcoming Inflation Reports Set the Tone for FX
EUR / USD - Euro Weakens Despite Rising Yields
EUR/USD weakened yesterday as markets rejected prices above the 1.0506 level. The euro continues to closely mirror the moves in the US dollar, and with the index strengthening slightly to 107.05, pressure on EUR/USD increased. Despite last week's weakness of the US dollar, the Fed's relatively hawkish stance compared to the ECB continues to weigh on the longer-term outlook for the pair. This situation persists despite the European bond market pricing in higher defence spending, particularly evidenced by the German 10-year yield reaching 2.51%. We believe that rather than acting as a bullish signal for the pair, this will serve as a buffer at the 1.0300 support level for now.
Technical indicators point to a near-term weakness, with the %K/%D stochastics suggesting that a sell signal is on the horizon as it converges on the downside out of the overbought territory.
On the downside, support levels at 1.0400 and 1.0388 at the 50 DMA stand firm. We expect the pair to soften back to these levels.
USD / JPY – Japan's Inflation Outlook Supports the Yen
USD/JPY bounced back yesterday as the support level of 151.24 held firm, indicating that technical indicators are influencing the short-term trend. The dollar's gains have also contributed to the upward momentum. Recent data from Japan has fuelled expectations for a continued hiking cycle by the BOJ. However, with the next meeting scheduled for March 19th, the markets are closely monitoring macroeconomic releases to assess overall sentiment.
With the Japanese Consumer Price Index (CPI) being released on Thursday, there is strong interest in potential gains for the yen. Markets are expecting an increase in inflation, with CPI projected to rise from 3.6% to 4.0% in January. This could bolster the yen, possibly leading to a rise to levels of 150.93 and 150 against the dollar.
This sentiment is further reinforced by the technical analysis, which indicates a bearish market structure as long as the pair remains below the 200 DMA resistance level at 152.68. Market expectations of potential BOJ rate hikes, possibly reaching 1.0% this year, coupled with Japan's improving economic fundamentals, suggest sustained support for the yen in the long term. The intervention appears unlikely due to the absence of extreme market volatility.
GBP / USD – UK CPI in Focus
GBP/USD weakened slightly yesterday, but the support at 1.2600 held firm, indicating that t is weakness is unlikely to lead to a trend reversal. UK economic indicators show that, despite a lacklustre growth performance, both the labour market and pricing pressure remain resilient, supporting the currency pair at current levels. Today's CPI print is crucial for shaping the near-term outlook for the pair, with expectations that it accelerated to 2.8% year-over-year in January.
The pair's immediate outlook appears cautiously optimistic, bolstered by the .2600 support level, though significant resistance looms at the 100-day moving average. Market attention is focused on upcoming UK inflation data, with the potential for a bullish breakthrough targeting 1.2700 if current levels hold.
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