EUR/USD and EUR/JPY Trend Hinges on Fed, ECB and BoJ Outlook; Volatility Ahead

Euro forecast:

• The Federal Reserve is expected to raise interest rates by 25 basis points on Wednesday
• The European Central Bank will disclose Monetary policy Announcement on Thursday, followed by the Bank of Japan on Friday
• This article is looking at EUR/USD And Euro / Japanese YenKey technical levels to watch during the upcoming trading sessions

Most read: JPY Forecast – USD/JPY is getting sensitized ahead of the Fed and Bank of Japan’s decision

Three of the world’s most important central banks will announce their monetary policy decisions this week. The Fed will be the first to do so on Wednesday, followed by the European Central Bank on Thursday and the Bank of Japan on Friday. Against this background, the US dollar, the euro and the Japanese yen are likely to experience increased volatility, which can create attractive trading setups, but also carries more risks.

Focusing first on the Fed, the rate-setting committee is expected to raise borrowing costs by 25 basis points to 5.25%-5.50% after a short pause. The move has already been fully discounted, so investors will mainly focus on the policy outlook for clues about the normalization drive.

If Powell maintains an aggressive stance as part of a strategy to prevent financial conditions from easing too much and to maintain discretion in the event that inflationary pressures return later this year to the point where additional tightening is necessary, interest rate expectations could drift higher, boosting the US dollar. This scenario could weigh on EUR/USD.

Euro forecast – The path of the EUR/USD and EUR/GBP is related to the policy prospects of the Federal Reserve and the European Central Bank

As for the ECB, the institution led by Christine Lagarde is also seen to raise interest rates by a quarter point, but its guidance is unlikely to be hawkish. Indeed, it is possible that the Bank will refrain from committing to further tightening, given the rising risks of deflation in the Eurozone, opting instead for a data-driven approach.

If Lagarde adopts a conciliatory message and shows reluctance to raise rates again in September, traders could quickly re-price the walking path, creating headwinds for the euro. This could mean a sharp decline in EUR/USD and EUR/JPY.

Finally, the Bank of Japan is expected to keep its current policy settings unchanged. However, there is little chance that policy makers will vote to adjust the yield curve control program in the context of steadily rising inflation. If the latter scenario occurs, the Japanese yen may make a strong comeback in the currency markets, reversing some of its previous losses against the US dollar and the euro.

Technical analysis of the EUR/USD pair

After Monday’s decline, EUR/USD fell below technical support at 1.1080. If this collapse continues in the coming days, we may see a move towards the psychological level of 1.1000. On further weakness, focus moves lower to 1.0950, followed by 1.0840. In contrast, if EUR/USD resumes its recovery, initial resistance will come in at 1.1180 and 1.1275 after that. If both ceilings are removed, buyers can launch an attack on 1.1375.

Technical chart of the EUR/USD pair

EUR/USD chart set up using TradingView

Technical analysis of the EUR/JPY pair

EUR/JPY rallied late last week and retested multi-year highs, but failed to clear this top, with prices falling on Monday after rejecting technical resistance. Too early to tell, but the pair appears to be developing a double top, which is a bearish reversal pattern that often forms in the context of an extended move higher.

If prices continue lower, initial support appears at 153.40. If this floor is removed, the double top will be confirmed, paving the way for a drop towards 151.50, followed by 148.45. Conversely, if the buyers regain control of the market and trigger an upward shift, the first resistance to consider is at 158.10 and 159.25 after that.

Technical chart of the EUR/JPY pair

EUR/JPY chart made using TradingView