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EUR/USD falls ahead of inflation data

EUR/USD is falling below 1.17 on Tuesday as investors look ahead to a busy week of economic data, which could direct monetary policy decisions from both the ECB and the Federal Reserve.

Eurozone flash inflation data for August is forecast to show the CPI at 2%, the central bank's target level for a third straight month, supporting the view that the ECB will keep interest rates unchanged at next week's meeting.

The stronger-than-expected manufacturing activity seen on Monday, as well as comments from ECB board member Isabel Schnabel, push me further evidence that the ECB will keep rates unchanged. Eurozone manufacturing PMI data yesterday showed that activity expanded for the first time since 2022, amid signs of recovery.

Meanwhile, the ongoing political uncertainty in France is also weighing on risk sentiment. While it is predominantly French assets that have reflected this uncertainty, some level of worry is likely limiting the EUR. The vote of confidence will take place on Monday.

The USD is rebounding on Tuesday as traders return from the long weekend; however, the price remains close to a 5-week low on Fed rate cut expectations.

Attention is on US ISM manufacturing data today, which is expected to show solid expansion, ahead of the key NFP report on Friday.
 

EUR/USD forecast – technical analysis

EUR/USD once again failed to rise above 1.17, facing rejection at the round number and falling trendline resistance. However, the downside remains supported by the 20 SMA AT 1.1660.

Buyers need to lose above 1.17 to extend gains towards 1.18 and 1.1830.

Sellers would need to break below the 20 SMA to extend losses towards 1.1580, last week’s low. A break below here creates a lower low and could fuel a deeper selloff to 1.14.
 

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USD/JPY jumps on USD recovery ahead of ISM manufacturing PMI

USD/JPY jumped to 148.50 on Tuesday. I made a modest rebound in the US dollar, lifting the pair to 14850. Uncertainty over the timing of the next BoJ hike, along with a positive tone around Asian equity markets, is undermining the safe-haven yen.

Growing acceptance that the BOJ will hike interest rates again could offer support to the yen; however, questions remain over whether this will occur at the October meeting or next year. Capital spending data released on Monday showed a snapback in business investment in the second quarter, which could boost the labour market and demand-driven inflation.

Meanwhile, Asian stocks posted strong gains on Tuesday, as a surge in China's CSI 300 contributed to the underperformance of the safe-haven yen.

Meanwhile, the US dollar is rising from a 5-week low. The USD has been under pressure, with traders pricing in almost a 90% probability of the Fed cutting interest rates by 25 basis points in September, which would mark a significant divergence from the more hawkish BoJ expectations.

This, combined with expectations that the Fed will cut interest rates twice by the end of the year, and fears over Fed independence, could limit gains in USD.

Attention now turns to US ISM manufacturing PMI data, which is expected to uptick to 49 from 48 in July. Attention will also be on prices paid, which is expected to tick higher to 65.1 from 64.8.

Other data points this week, including ISM services, PMI job openings, ADP payrolls, and most importantly, the nonfarm payroll on Friday, will all provide clues over the Fed's ability to reduce rates this year.
 

USD/JPY forecast - technical analysis

USD/JPY trades within a familiar range, capped on the upside by 148.50. The price has been supported on the downside by the 50 SMA at 147.

The price recovered from the 50 SMA and has extended sharply higher to 148.50 resistance. The bullish engulfing candle and the RSI above 50 keep buyers hopeful of further upside.

Buyers will look to rise above 148.50 and the 200 SMA at 149 to create a higher high and bring 150.00 into focus.

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