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

Euro (EUR/USD, EUR/JPY) Analysis

EUR/USD On Track for Fourth Consecutive Weekly Loss: Neutral Weekly Outlook

The euro navigated a tricky week, ultimately on track to end lower the week down. A surprise windfall tax, to be levied on Italian banks, was announced on Tuesday, sending the pair sharply lower. Prices recovered the following day upon reassurance from the Italian president that the tax would amount to no more than 0.1% of total bank assets. US inflation then edged higher, something the market appeared content with but after a volatile daily move had the pair near flat on the day.

In the week to come there is a notable drop-off in terms of high impact risk events with EU and German ZEW economic sentiment the only standouts. Final inflation data for July and the second estimate of Q2 GDP is unlikely to move the needle much unless the data differs significantly from prior readings.

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The daily chart opens up the possibility for the pair to trade between 1.1012 and 1.0910 in the week to come. With inflation in the US and Europe broadly moving in the right direction and both regions’ central banks at or very close to reaching terminal rates, there are fewer obvious drivers for either currency.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

The weekly chart shows the longer-term uptrend which has developed in a rather choppy fashion, now heading lower but stalling at the 1.0930 level. In the event the bearish directional move extends, 1.0833 becomes the next level of interest (a level that corresponds to the weekly lows at the end of June and early July).

Weekly EUR/USD Chart

Source: TradingView, prepared by Richard Snow

Markets have a consensus view that the ECB will pause rate hikes in September but still price in the possibility of another 25-bps hike before the end of the year. Economists polled by Reuters revealed a slight majority of economists (53%) agree with that view. Stubborn core inflation in the EU for July complicates the situation but given the deteriorating economic data (German and EU manufacturing PMI and a growth slowdown, despite a slight improvement in Q2 GDP) weighs on the ECB’s hawkish resolve.

Market Implied Rate Expectations

Source: Refinitiv, prepared by Richard Snow

EUR/JPY Prints Fresh Yearly High as Yen Depreciation Reaches ‘Intervention Territory’: Bearish Weekly Outlook

Despite few euro drivers, EUR/JPY broke above prior resistance with relative ease on Thursday and remains at similar levels heading into the weekend. The move was more as a result of a weaker yen than stronger euro after BoJ officials quickly admitted that the recent yield curve adjustment had dovish rather than hawkish intentions behind it. At the same time, interest rate differentials remain wide keeping the carry trade in play.

Further bullish momentum from here is tricky to get behind given that USD/JPY is at 145 – a level that Japanese officials expressed dissatisfaction over and previously intervened in the FX market to strengthen the currency. Japanese GDP and inflation is due next week, raising interest in the pair at the start and end of the week.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX