Forex Friday

Today's growth figures are unlikely to force the RBA into any easing action, but it has been enough to weigh on the Australian dollar and ASX 200. And this could allow EUR/AUD to continue higher after a 4-day retracement.

We will maintain our bearish EUR/USD forecast for the time being. This pair remains rooted in a bear trend, not just because of the threats of tariffs in 2025, but more so because of weakness in the eurozone economy and therefore the potential for more ECB rate cuts than from the Fed in the US, where even a December rate cut is not fully priced in, let alone cuts in 2025, after Trump’s election victory.

Against a backdrop of weakening economic data, looming tariffs from the US in 2025 and a struggling Chinese economy (bad for Eurozone exports), the euro outlook remains negative, putting pairs such as the EUR/USD and EUR/JPY into focus – the latter having just formed a bearish technical signal.

With Kashkari throwing the word ‘pause’ into the mix ahead of a US CPI report, traders should brace themselves for further USD gains should it come in hotter than expected.

While one can argue the greenback has made a short-term peak, the overall dollar forecast remains positive, especially against currencies subject to increased tariff risks from Trump’s administration.

Market participants are closely watching the potential impact of a Trump victory on European and Chinese assets, given the possibility of renewed tariffs. This is the primary factor affecting the EUR/USD forecast, likely limiting gains to around 1.0900 and exposing further downside in the near-term outlook.

Soft data and month-end flows jolted the USD at its cycle highs. If the USD pulls back even slightly, it could help lift AUD/USD from its lows and track the yuan higher.

EURUSD, GBPUSD Analysis: Both EURUSD and GBPUSD are facing downward pressure as inflation trends in the UK and Eurozone decelerate, while inflation and employment data in the US exceed expectations. Both pairs are retesting critical support levels ahead of a busy week in the economic calendar.

Judging by price action in the FX and rates markets, investors are certainly looking for a dovish rate decision. This could be in the form of a surprise 50 basis point cut, or 25 bps cut with a strong hint of at least one 50 bps cut in the remaining 2 meetings later this year. Ahead of next week’s central bank bonanza, when the Bank of England and Bank of Japan will also decide on their own monetary policies, the US dollar forecast remains bearish.

EURUSD, Gold Analysis: Following the ECB’s priced-in rate cut decision and growing uncertainty over the global political landscape, both EURUSD and Gold are showing positive trends. With the upcoming FOMC meeting, high volatility is expected in the near term.

Despite the uptick in wages, this was a rather weak jobs report. Not only did the headline data show only a modest +142K rise in nonfarm jobs in August (vs. +165K expected), revisions reduced reported employment for June and July sharply - by a good 86K.

EURUSD, DXY Analysis: Both the EURUSD and the US Dollar Index (DXY) are hovering around critical levels that could determine whether we see a trend reversal or confirmation. These levels are closely tied to the extremes of December and July 2023, with market participants eagerly awaiting policy decisions to solidify the trends.

USDJPY Outlook: With Tokyo’s Core CPI reaching 2024 highs and key economic data from the US on the horizon, the USDJPY chart is positioned for either intensified bearish pressures or a potential hold above the critical 140 barrier.

I think gold is likely to reach $2500, possibly in the next few trading days. For one thing, the underlying trend remains bullish, which is discouraging bearish speculators to step in ahead of such a big psychologically important level. For another, there are little fundamental justifications for short selling gold.

Following the recovery in the equity markets and calmer conditions across asset crosses, the markets have started to warm towards pro-cyclical currencies after initially favouring haven ones or those where interest rates are lower, when all the turmoil started last week after yen-funded carry trades came under intense pressure.

There is one more macro even left that could provide even more volatility in the markets, namely the ISM services PMI on Monday. I reckon once the equity market volatility settles, the recent weakness in US data should translate into a more widespread dollar weakness. So, I maintain a bearish dollar forecast for the week ahead, especially now that we have seen a weaker jobs report today.

Our EUR/USD forecast remains bullish but in light of the dollar recovery and the mild risk-off sentiment, we wouldn’t rule out some further short-term weakness after rates fell back below the 1.09 handle following the ECB’s rate decision. The week ahead promises to be an important one for the FX markets, with the release of global PMIs, US GDP and the Fed’s favourite inflation measure.