Euro Picks up after Markets Signal End to US Rate Hikes

Euro Weekly Forecast: Bullish EUR/USD, Mixed EUR/JPY

• The US dollar slide benefits EUR/USD as markets signal end to US hikes
• EUR/JPY rises after FX intervention threat subsides
• Risk events ahead: Fed and ECB members return with full force after mandated blackouts in what is a relatively quiet week regarding scheduled event risk
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

US Dollar Slide Benefits EUR/USD as Markets Signal End to US Hikes

Markets foresee very little chance of another Fed hike despite US GDP growth in the third quarter surprising to the upside. That is because The Fed continues to make mention of ever tightening financial conditions (enabled via elevated bond yields) and signs of a slowing labour market after Friday’s NFP miss. Nonfarm peril data for October revealed fewer than anticipated jobs being added to the economy (150k vs 180k). In addition, the unemployment rate edged slightly higher to 3.9% and average hourly earnings declined month on month as well as compared to October last year – a near perfect cocktail for the Fed.

Markets now find it highly unlikely that we will see another hike, with implied probabilities from Fed funds futures revealing a 4.3% chance of a December hike. For context, just a month ago this figure was just under 40%.

CME FedWatch Tool Showing Implied Probabilities of Interest Rate Moves

Source: TradingView, prepared by Richard Snow

EUR/USD shot up in dramatic style late on Friday after NFP data revealed a slowing job market. The pair had tried to build on the recent ascending channel but had breached the underside of the zone on multiple occasions – hinting at a bearish continuation. The latest shift in the data and changing market view, now has the pair testing the upper bound of the very same channel.

A weekly close above the significant 1.0700 highlights the 1.0830 mark and the 200 simple moving average (SMA) just before it. However the majority of the move is driven by the dollar meaning any escalating tensions in the Middle East could restrict this move in the event the dollar picks up a safe haven bid. However, most of the war premium has been observed in gold with the dollar not really showing much responsiveness to the tensions.

Source: TradingView, prepared by Richard Snow

EUR/JPY Rises After FX Intervention Threat Subsides

In a strange turn of events EUR/JPY rose after the Bank of Japan removed any explicit limit on 10 year government bond yields. In fact, the yen declined against a broad number of G7 currencies in a move that ordinarily or to result in currency appreciation.

Japanese government bonds immediately rose to test the former cap of one percent, pulling back somewhat into the end of the week but remaining elevated.

Japanese 10-Year Government Bond Yields

Source: TradingView, prepared by Richard Snow

EUR/USD formed a morning star at prior support at 158.00 before consolidating near the weekly high. It must be noted that the morning star pattern provides the strongest signal at the bottom of a downtrend but nevertheless, the candle formation signals a renewal of bullish impetus. The pair broke above the prior high of 159.76 where it is on track to close the week. The pair is yet to tread into overbought territory meaning a hold above 159.76 keeps the door open for an extended bullish move towards 162.42.

The neutral guidance accompanying this report is due to the fact that the euro contains few if any bullish drivers. the ECB is in no hurry to raise interest rates given the economic stress being felt across the eurozone and welcome progress on inflation. Q3 revealed a minor economic contraction for the EU placing the euro on the back foot. it is for this backdrop that bullish continuation depends mainly on yen deterioration. as the Bank of Japan prepares the foundation for a historic pivot away from negative interest rate policy, it won’t be long before markets priced this in alongside the effect of rising Japanese government bond yields.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

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Major risk events in the week ahead

Next week is littered with central bank speakers, mainly from the Fed, as they emerge from their media blackout periods. We have already heard from prominent ECB members, who as a whole, insist that financial conditions need to remain tight.

Notable speakers include Christine Lagarde and fed chair Jerome Powell as he takes part in a panel discussion on the 9th of November where markets will pay attention to any further comments on the current state of the US economy and outlook. German inflation data is likely to show a continued decline in the general level of prices for you Europe’s biggest economy. Not shown here but next week we also get minutes of the BOJ decision from the week gone by.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX