EURUSD, JPY Forecast: Euro Falling on Weak PMIs, JPY Rising! 25th July 2024

Despite the euro's struggles, the Japanese yen is rising. The strengthening yen reflects the tightening bond yield spread between Japan and the rest of the world, which ballooned after years of overly expansionary monetary policy in Japan. In contrast, the rest of the world aggressively contracted to battle inflation.

EUR/JPY Forecast: What's Next?

On July 24, 2024, the US dollar fell against the Japanese yen and Swiss franc but gained against all other major currencies, with the euro plunging for a second day after poor eurozone PMI data. Japanese bond yields rise while US and Eurozone yields fall, boosting the yen ahead of the Bank of Japan's meeting and rumors of a ten-basis-point rate hike. The yen has been recovering from its significant fall till early this month, but the euro is struggling due to dismal statistics. The EUR/JPY or EUR/USD has lost some recent gains. The latest PMI survey shows that the eurozone's manufacturing and services sectors stagnate, disappointing the ECB. Eurozone optimism has been fading since the start of the year.

Source: Trading economic

Business optimism and more robust first-quarter GDP growth raised prospects for a strong recovery. However, new evidence has lowered expectations.

PMI data implies that Eurozone recovery is slowing.

The July eurozone PMI composite index fell to 50.1 from 50.8 in June, barely above the expansion-contraction border. This reduction suggests economic activity will weaken in the third quarter. Manufacturing's PMI dropped to 45.6, indicating weakening, while services' fell to 51.9. Worse, growing input costs cause inflation.

France's PMI improved somewhat but remained below 50 due to weakening manufacturing confidence. Germany's PMI dropped below 50, indicating a weakening manufacturing and services mood. The economy barely improved after hosting the Euros, a big sporting event. With the Olympics commencing in Paris, France hopes to strengthen.

France composite PMI

ECB President Christine Lagarde has stated that eurozone growth risks have increased. While other growth indicators outside PMIs exist, the latest readings show the eurozone's slow recovery, which lowers the EUR/JPY estimate.

Japanese yen dominates FX.

The Japanese yen has roared back up the currency ladder while the euro has faltered. The bond yield differential between Japan and the rest of the world has been narrowing, strengthening the yen. This disparity ballooned during Japan's excessive expansionary monetary policy while the rest of the world followed sharp contractionary policies to confront runaway inflation. Japan has only begun to tighten its belt, while other central banks have already started or are about to cut interest rates. Consequently, rates in Japan are rising slowly while yields globally are falling. The focus is now on next week's Bank of Japan meeting, where expectations are high for an interest rate hike of ten basis points. With the yen's recent recovery, there is less incentive for the Japanese government to intervene, but it is still possible. However, with the weaker PMI data, the likelihood of another rate decrease in the Eurozone has grown.

EUR/USD falls as the dollar trades volatility before US data.

In the meantime, the US dollar has appreciated compared to all other currencies, including the euro, but it has declined further compared to the yen and franc. Although this has caused the EUR/USD to fall, it may still profit from the possibility that the dollar will continue to decline generally. A 98% chance of a rate cut in September is currently priced in by the market. If the market is disappointed by the expected US data this week, it will begin to look beyond September and speculate about an additional rate reduction. US PMIs are due later today; we have GDP and Core PCE on Thursday and Friday.

This week, the US presidential election took an unexpected turn when Joe Biden withdrew from the contest. In light of this abrupt action, the dollar's future and the direction of risky assets are now uncertain. The close-fought contest between Trump and Harris will impact the dollar's value. Amidst the decline in crude oil and copper prices due to worries about China's economic stability, the US dollar has dropped vs. the yen but substantially rebounded against commodity dollars.

However, the Federal Reserve's choices over interest rates continue to have the most impact on the dollar's value. Regardless of the election outcome, investors are sure the Fed will start reducing rates in September. The dollar may weaken as worries over China fade, and we will turn our attention back to economic data later this week. Because of this, the EUR/USD should only see minor declines.

Chart Analysis?

Source: MT5

Popular yen pairings have broken through essential support levels due to the sudden change in the yen's fortunes, which has set the EUR/JPY outlook on a bearish technical trajectory. The EUR/JPY has dropped significantly from its peak in July of 175.42, the highest point in decades, by more than 800 pip. The EUR/JPY lost around 450 pip points just this week, as selling intensified following the break of the bullish trend line that dates back to December. Clearly, the breakdown activated many stop orders that were likely resting below that trend line. It's interesting to note that the trend line broke slightly below the 170 handle and about the same as the 2008 peak. We have observed a pick-up in selling throughout the last two trading sessions, which makes sense, given the level's historical significance.

If a kick-back recovery occurs in the next few days, the 169.95–170.00 region will now be a crucial resistance zone to watch. Interim resistances ahead of that level are the now-broken June low of 167.52 and Tuesday's low of 168.83.

The 38.2% Fibonacci retracement against the December advance is at 166.92, which could serve as potential support. The 50% retracement level and the 2023 high, at 164.30, are the following key levels to watch below that mark. The 200-day average is close to the 164.00 handle, making that region an important support zone. The question is whether we will arrive at that point.