#EURUSD & #USDJPY Forecast (25 Sept 2023)

Posted by Clara Mellor on 10:05 with No comments

EUR/USD: Dollar Rallies Alongside Surging Yields

  • Fed rate hike expectations for November 1st stand at 18.6% vs 30% from a week ago
  • Germany IFO Business climate declines for a fifth straight month
  • 10-year Treasury yield surges 7.7bps to 4.511%

The euro softened earlier after an uninspiring German business outlook suggests the eurozone’s largest economy still has a rough road ahead. This was the fifth straight month of declines for Germany’s business confidence. Investors focused on the expectations survey’s slight miss. The IFO economists believe that a third quarter contraction is likely. As long as the ECB is done raising rates, the outlook should gradually improve for Germany.

US dollar strength remains as global bond yields shift higher on fears that central banks will follow the Fed’s lead and keep rates higher over the long-term. It is a slow start to Monday, with one economic release and one Fed speaker, but right now it seems a weaker consumer is steadily getting priced in.

The Chicago Fed National Activity index showed slower growth in August, which didn’t surprise anyone.

Fed’s Goolsbee, one of the more dovish members, noted that the risk of inflation staying too high is the bigger risk. He is still holding onto hopes that a soft landing is possible, but he will likely be data dependent. Inflation flare up risks are growing and that still suggests the Fed might have to do more tightening despite the trajectory of the economy.

Retail/US consumer

Retail stocks, Foot Locker and Urban Outfitters both got downgraded to hold by Jefferies as the consumer is faced with headwinds. Softer spending with apparel and footwear will be driven on the resumption of student loan repayments.

Last week, Bankrate’s survey noted that 40% of Americans feel financially burdened by holiday shopping. Two weeks ago, Deloitte forecasted soft holiday sales.

It is no surprise that the consumer won’t be spending as much this holiday season given excess savings will have disappeared, credit card balances will become crippling with higher rates, and the labor market will be seeing some type of a slowdown.

Sticky inflation which comes with renewed dollar strength risks remain a risk on the table as oil prices appear poised to remain elevated all the way through the winter. Also on the minds of traders is the rising risk of a government shutdown next week.

EUR/USD Daily Chart

The dollar remains king but that could show some signs of exhaustion once the euro falls towards the 1.05 handle. As long the global outlook doesn’t fall apart, the dollar should be nearing a peak.



USD/JPY Forecast: USD Gains Ground Amid Bank of Japan Inaction

A sustained push above ¥150 could potentially lead to further advances.

  • During the Friday session, the USD/JPY currency pair staged a modest rally as the Bank of Japan remained relatively passive overnight, refraining from any substantial announcements or interventions in the currency market.
  • This came as a surprise to some, given the speculation that they might take measures to defend their currency or employ verbal tactics to curb selling pressure.
  • However, the lack of action resulted in an upward push for the US dollar, reigniting interest in the ¥150 level.

Consolidation Ahead

The current market landscape suggests a period of consolidation and hanging around, primarily due to the significant interest rate differential between the two currencies. This differential continues to favor the US dollar, as traders can accumulate gains by merely holding positions and benefiting from overnight swaps. Additionally, the Bank of Japan's inaction underscores the delicate position they find themselves in, as they attempt to maintain low interest rates amidst a massive debt burden, leaving them with limited options to influence their currency's value.

Looking ahead, it's plausible that any dips in the US dollar will attract eager buyers, with particular attention on the ¥147 level, historically significant in previous trading. Conversely, the ¥150 level represents a formidable psychological barrier that many market participants will closely monitor. A breakthrough at this level could pave the way for further upward movement, with the ¥152 level serving as a potential target. Nevertheless, the current market behavior is characterized by choppiness, prompting traders to seek value opportunities whenever the US dollar experiences temporary declines.

This is a longer-term trajectory that we will continue to see in this market. It doesn’t mean that it will be easy because we have seen so much in the way of inertia being put into this market. The USD continues to be one of the most favored currencies, and the BoJ really showed how impotent it is at the moment last night.

In conclusion, the US dollar made gains during the Friday session, buoyed by the Bank of Japan's decision to remain on the sidelines. The market continues to exhibit a preference for the US dollar, driven by the significant interest rate differential. While consolidation and choppiness prevail, traders are vigilant for opportunities, with ¥147 and ¥150 levels garnering attention. A sustained push above ¥150 could potentially lead to further advances. Ultimately, market participants seem inclined to favor the US dollar in this one-way trade scenario.



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