Euro/USD continues to decline, ECB's moderate rate hike becomes a turning point

Economic Fundamentals Are Out of Balance, Euro Trend Forecast Faces New Challenges

Last week, the US dollar index rose by 0.22%, with notable divergence among non-US currencies. The Japanese yen slightly declined by 0.01%, the euro fell by 0.40%, while the Australian dollar increased by 0.9%. The euro/USD declined by 0.4% over the week, reflecting significant divergence in economic outlooks between Europe and the US.

The European Central Bank announced a 25 basis point rate hike on September 14, but more importantly, it signaled its future policy path. The central bank explicitly stated in its monetary policy statement that the key interest rates have reached a level sufficient to maintain, effectively signaling the end of this rate hike cycle. Simultaneously, economic outlooks were adjusted: 2023 GDP growth forecast lowered to 0.7% (from 0.9%), further revised down to 1% in 2024 (from 1.5%), and 1.5% in 2025 (from 1.6%). Inflation forecasts were revised upward, with Europe’s inflation expected to be 3.2% in 2024, up 0.2 percentage points from June’s forecast.

This data conveys a hidden concern: Europe’s economic growth is sluggish, and inflationary pressures persist, with stagflation risks emerging. In stark contrast, the US economy remains resilient. August retail sales increased by 0.6% month-over-month, far exceeding the expected 0.1%; the same month, PPI rose by 1.6% YoY, above the expected 1.3%. This stark contrast in economic performance caused the euro/USD to plummet by 0.8% on September 14.

Euro Trend Forecast: Medium-Term Downward Pressure Remains

From a fundamental perspective, the widening gap between Europe’s recession risks and the US’s strong growth has become the dominant logic in euro/USD pricing. The market generally believes that, in the medium term, euro/USD will struggle to break its downward trend. However, in the short term, if this week’s Federal Reserve meeting signals a dovish stance, investors may interpret it as dovish, potentially leading to a technical rebound for euro/USD.

On the technical side, euro/USD has broken below previous support levels and remains in a downtrend channel. Notably, the RSI indicator is approaching oversold territory, indicating a possible short-term rebound or correction for the euro. Key levels to watch this week are resistance at 1.077 and support at 1.060.

USD/JPY: Balance Amidst Volatility

USD/JPY fluctuated last week, initially falling then rising again. The decline was influenced by the hawkish comments from Bank of Japan Governor Ueda Yuki, but the trend later reversed. Insiders suggest that the remarks were not policy signals but a reiteration of risk considerations during decision-making. Despite this, officials acknowledge strong inflation momentum, hinting at an upward revision of inflation outlooks for the October quarter.

Deutsche Securities’ chief Japanese economist predicts that the Bank of Japan will eliminate Yield Curve Control (YCC) in October and may end its negative interest rate policy by January next year. However, Bloomberg economists forecast that the BOJ is unlikely to change its policy at this week’s September meeting.

From the Japanese government’s perspective, the urgency to intervene in the yen has significantly decreased. Yen depreciation benefits Japan’s exports, overseas revenue, and investment income. Overall, maintaining a weak yen is more advantageous for Japan’s economy. Therefore, Japanese authorities are more likely to issue verbal warnings to prevent rapid yen appreciation that could disrupt capital flows.

Euro Trend Forecast and Technical Analysis

USD/JPY remains above the 21-day moving average, indicating a relatively strong bullish signal. However, the MACD shows a tug-of-war between bullish and bearish forces, implying a potential reversal. This week, USD/JPY is expected to rally and then retreat, continuing a volatile pattern. Resistance is seen at 148.5, with support at 146.5.

In summary, the core variable influencing euro trend forecasts remains the relative outlook of the European and American economies. Investors should closely monitor the Fed’s rate decision; if a dovish stance emerges, euro/USD may have a short-term relief. Meanwhile, if USD/JPY quickly breaks through the 148 level, Japanese authorities may again intervene verbally, and investors should stay alert.