Six-week consecutive decline, EUR/USD poised for a rebound?

Last week (8/21-8/25), the US Dollar Index rose by 0.68%, marking its sixth consecutive weekly gain. Most non-US currencies declined, with the British Pound depreciating by 1.2%, experiencing the largest decline.

【Source: MacroMicro；Date2023/8/21-2023/8/25】

【Source: MacroMicro；Date2023/1/1-2023/8/25】

Last week, the euro/dollar declined by 0.68%, marking its sixth consecutive weekly decrease. The main reasons for this were the relatively weak economic data from the Eurozone and Powell's hawkish speech at the Jackson Hole Symposium.

Data revealed that the preliminary Composite PMI for the Eurozone in August was 47, lower than expected, reaching a new low since May 2020. The preliminary Services PMI unexpectedly dropped to 48.3 from the previous value of 50.9, entering contraction territory for the first time this year.

Similarly, PMI data in the United States also weakened, with a preliminary Composite PMI recording 50.4, hitting a new low since February this year. However, compared to the Eurozone, the overall US economy remains relatively strong.

【Source：MacroMicro 】

Following the release of the data, market expectations for an interest rate hike by the European Central Bank (ECB) next month significantly diminished, with the probability of a 25 basis point increase in September dropping from around 80% at the beginning of the week to approximately 40%.

Meanwhile, at the Jackson Hole Symposium, Powell sent a hawkish signal, implying the possibility of further rate hikes. This raised market expectations for another rate hike by the Federal Reserve within the year, causing US bond yields to rise and widening the German-US yield spread, which subsequently led to the decline of the euro.

【Source：MacroMicro】

Mitrade Analyst：

Changes in expectations of interest rate hikes by central banks in Europe and the United States, as well as the relative performance of their economies, are key factors influencing the euro/dollar exchange rate. Pay attention to the release of US August non-farm payroll data and inflation data for both the US and the Eurozone this week. If US employment and inflation data decline, the upward momentum of the dollar will slow down, and there is a possibility of a rebound in the euro/dollar exchange rate.

From a technical perspective, the euro/dollar has fallen to around the 200-day moving average at 1.08. If it breaks below 1.076, the euro may further decline, with support seen at the previous low of 1.07. However, considering that the RSI indicator is already approaching the oversold zone, there is a greater likelihood of a short-term rebound in the euro/dollar, with resistance seen at 1.09.

【Source：TradingView】

Last week, the USD/JPY initially declined and then rebounded, ultimately closing with a 0.7% gain. The appreciation of the yen was primarily driven by safe-haven sentiment, while its depreciation was mainly due to a stronger US dollar and lower-than-expected inflation data.

Data shows that Tokyo's CPI in August increased by 2.9% year-on-year, falling short of expectations. The core CPI, which excludes fresh food, rose by 2.8% year-on-year, marking the first drop below the 3.0% threshold since September 2022. The core-core CPI, excluding both fresh food and energy, increased by 4%.

【Source：MacroMicro】

The underwhelming inflation data suggests that the market may perceive the normalization of monetary policy by the Bank of Japan to be slower. Meanwhile, Federal Reserve Chairman Jerome Powell expressed hawkish views at the Jackson Hole Symposium, raising expectations of interest rate hikes within the year and causing the US dollar index to rise by 0.2%, consequently impacting the yen.

Kazuo Ueda, the Governor of the Bank of Japan, who participated in the Jackson Hole Symposium, stated that the pace of price growth in Japan remains below the central bank's target, and therefore, the Bank of Japan will continue implementing its current ultra-loose monetary policy.

Mitrade Analyst：

Under the hawkish tone of the Federal Reserve and the dovish stance of the Bank of Japan, there is significant resistance for USD/JPY to move lower. Attention is focused on the US non-farm payroll data to be released this Friday, as a weaker-than-expected outcome could potentially lead to a slight decline in USD/JPY.

From a technical standpoint, USD/JPY has already risen to around 146.50, the highest level this year. If it can effectively break through this key level, USD/JPY is likely to continue rising, with the next resistance at 147.4. Conversely, if it fails to successfully break above, the probability of a pullback increases, with support seen at the 21-day moving average of 144.5.

【Source：TradingView】