EUR/USD, USD/JPY Forecast: Two trades to watch

EUR/USD attempts to recover ahead of German inflation data

• EUR/USD rises after 4-days of losses
• German CPI is expected to rise to 3.7% YoY in December from 3.2%
• EUR/USD found support at 1.09

EUR/USD is rising after four days of losses as the US dollar rally pauses for breath.

EUR/USD is attempting to retrace recent losses and has risen above 109.30 in the European session as attention turns towards eurozone PMI data and German inflation figures.

German inflation is expected to rise to 3.7% YoY in December, up from 3.2% YoY in November. Hotter CPI could see the euro find demand as investors rein in ECB rate-cut bets. Currently, the market considers that the ECB could be one of the first major central banks to cut interest rates with an aggressive easing monetary cycle expected across the year. However, the data is unlikely to impact the ECB's position as policymakers have reaffirmed that whilst peak rates may be in, it's far too premature to discuss cutting.

Eurozone services and composite PMI data are due. This is the final reading for December and is expected to confirm the preliminary reading that services activity slowed to 48.1, down from 48.7. A downward revision could raise concerns of a deeper and prolonged recession in the region.

Meanwhile, the US dollar continues to hover around the two-week high as investors have reined in Federal Reserve rate cut bets. US ADP payrolls and jobless claims data could move the dial in the US session.

EUR/USD forecast – technical analysis

After rising to 1.1140, a multi-month high in late December, EUR/USD failed to maintain its strength, falling lower before finding support at 1.09. From here, the price is attempting to grind higher, rising above the 20 SMA at 1.0930.

A continued recovery could see bulls aiming for 1.10, the psychological level, ahead of 1.1065, the August high, and 1.1145.

Failure to hold above the 20 SMA could see a re-test of 1.0890, yesterday’s low, which would expose the 200 SMA at 1.0845.

USD/JPY rises after FOMC minutes & ahead of jobs data

• Policymakers see rates staying high for now
• US ADP payrolls are expected to rise to 115k from 103k
• USD/JPY rises above the 200 SMA

USD/JPY is rising for a third session, boosted by the minutes from the December FOMC meeting. The minutes showed that policymakers believed rates will stay high for some time they also acknowledged that they were probably at peak rake and would begin cutting in 2024. The minutes failed to provide further clarity over the timing of any rate cuts and gave no indication that easing could begin as soon as March as the market is pricing in.

According to the CME fed watch market is currently pricing in hey 67% probability of a 25 basis point rate cut in the March meeting.

Meanwhile, the Japanese yen has been struggling after the New Year's Day earthquake collision at Tokyo airport.

Looking ahead, attention will now turn to US ADP payroll and jobless claims data.

ADP payrolls are expected to report a 115K increase in employment in December, up from 103K in November. Jobless claim forecasts are also bullish, with economists predicting initial progress claims to fall to 215k from 218K.

Stronger than expected labor market data could reduce bets over the Q1 fed rate cut ahead of Friday's nonfarm payroll report.

As well as labour market data S&P services PMI will also warrant attention and is expected to increase to 51.3 in December from 50.8 in November, confirming the preliminary reading. An upward revision with the support a less dovish path from the Federal Reserve.

USD/JPY forecast – technical analysis

USD/JPY is extending its recovery from 140.25, the December low, rising above the falling trendline dating back to mid-November and rising above the 200 SMA.

If the bullish break out is sustained, buyers could look towards resistance at 144.80 the December 19 high, 145.00 round number before brining 146.50 into play.

Failure to hold above the 200 SMA, and a deteriorating sentiment towards the USD could see the pair look back towards support at 140.80 the January low and 140.25 the December low.