Despite raising US interest rates at a larger pace than expected the price of the US dollar against the Japanese yen (USD/JPY) currency pair experienced selling, as it lost more than 200 pips during yesterday’s trading session only. The currency pair fell from the resistance level of 135.58, the highest in 24 years, to the level of 133.50 before settling around 134.00 in the beginning of trading. In an effort to combat high US inflation, the Federal Reserve yesterday announced the largest increase in US interest rates in nearly thirty years. The Federal Reserve revealed that it decided to raise the target rate for the federal funds rate by 75 basis points to 1.50 to 1.75 percent, marking the largest rate hike since 1994.

The widely expected move by the Federal Reserve comes as a recent report from the Labor Department showed US consumer price inflation at the fastest annual rate in forty years.

Citing its goals of maximum employment and 2 percent inflation over the long term, the Fed also indicated that additional rate hikes would likely be appropriate. The Fed also said it will continue to reduce its holdings of Treasury securities, agency debt and agency mortgage-backed securities.

In its assessment of the US economy, the Fed said that overall economic activity appears to have rebounded after declining in the first quarter. The central bank described recent job gains as “strong” and noted that the unemployment rate remains low.

“Inflation remained elevated, reflecting pandemic-related supply and demand imbalances, higher energy prices, and broader price pressures,” the Fed said in its policy statement. However, the decision to raise rates by 75 basis points was not unanimous, as Kansas City Fed President Esther George preferred to raise rates by 50 basis points.

The Fed’s next monetary policy meeting is scheduled for July 26-27.

According to the technical analysis: USD/JPY has formed higher bottoms and higher tops on the hourly chart, creating a bullish channel pattern that may hold even after the FOMC decision. The price is approaching the support, which is aligned with the 100 SMA dynamic inflection point. So far, the 100 SMA is still above the 200 SMA to confirm that the general trend is still to the upside and that the support is more likely to continue than broken. In this case, USD/JPY could bounce back to the top of the channel around 136.00 or the important mid-channel area at 135.50.

Note, however, that the gap between the moving averages is narrowing to reflect a slowdown in upward pressure. Stochastic is also heading lower to show that sellers are in control at the moment i.e. until the oversold conditions are met. The RSI has more room to go lower before indicating oversold levels, so sellers can stay in control for a while. A break below the channel bottom around the minor psychological mark 134.50 may trigger a bullish reversal.

It may remain so until the most important event for this week, which is the interest decisions from the US Federal Reserve, through which it is expected to raise rates. I have often noted in the past that the divergence in economic performance and the future of monetary policy tightening between the eurozone and the United States will ultimately be in favor of the US dollar.

The euro can avoid falling to parity against the dollar as long as current expectations of continued economic growth in the eurozone are met, says an analyst at a major European investment bank and lender. However, Rabobank warns customers that they are reconsidering their current set of expectations for the euro-dollar exchange rate because of the ongoing pressures from high energy prices and the war in Ukraine.

The EUR/USD exchange rate rebounded a bit ahead of the weekend as the market was eyeing a series of six consecutive daily declines which fueled talk of a possible drop to 1.0 EUR/USD. Expectations have grown that the Euro and the Dollar may only reach parity after the exchange rate fell about 2.0% in the week ending April 29th and remains weak at the time of writing on Tuesday May 3rd.

A combination of unbridled US dollar strength and fears that the eurozone economy will continue to face headwinds from rising energy costs contributed to these declines. Accordingly, Jane Foley, senior FX analyst at Rabobank, said, “The strength of the US dollar in recent sessions has prompted a debate about whether the EUR/USD is heading towards parity.” A large part of the reason for the euro’s drop to 1.0471 in the middle of last week was on the back of reports that Russia cut energy supplies to Poland and Bulgaria. Accordingly, Foley says, this “exposes the risks associated with energy security in Europe”.

Economists fear that more energy constraints are looming, especially as Russia may seek to weaponize goods in the face of increased Western arms supplies to Ukraine. This will have a significant impact on the eurozone economy: the consensus and the European Central Bank (ECB) do not currently expect the bloc to fall into recession, but an intensification of the energy supply shock could lead to such an outcome.

The European Central Bank forecast shows that the war between Russia and Ukraine is likely to reduce the GDP of the Eurozone for 2022 by 0.5 percentage point, bringing GDP growth at 3.7% in 2022 and 2.8% in 2023. Economists say AMP Capital says the ECB is overly optimistic: they see GDP growth of 2.9% in 2022 and 3% in 2023.

“The risk of a recession in the first half of 2022 is high,” says Diana Musina, an economist at AMP Capital.

Whether the eurozone slips into recession will affect how the European Central Bank deals with the issue of raising interest rates, which in turn will have implications for the euro exchange rates. If the economy is in recession, the European Central Bank may argue again about indications that it is now ready to raise interest rates as soon as possible in July in order to fend off inflation.

Any pullback from the current ECB rate hike is likely to deprive the Euro of support. Accordingly, forex analysts at Italian bank UniCredit say that the significant uncertainty across the markets means that there is now a need to focus on “extreme scenarios” pursued by the European Central Bank.

They say the ECB could either:

1) He decided to back away from plans for a policy of “normalization” (i.e., move towards higher interest rates) in the face of a complete stagnation in the eurozone.

2) Raising interest rates to get inflation back on track.

“In a pessimistic scenario, the ECB backs away from normalization plans to tackle a systemic stagnation across the eurozone even in the face of inflation approaching 10%, while in a hawkish scenario, the bank becomes The European Central is constrained, raises the deposit rate to 2.0 -2.50%.”

The European Central Bank is likely to continue raising interest rates and “normalizing” policy if a recession is averted.

According to the technical analysis of the pair: There is no change in my technical view of the performance of the EUR/USD currency pair. The general trend is still bearish and the current stability around the 1.0500 support may not be the end as long as the weakness factors of the currency pair exist. The continuation of the Russian-Ukrainian war and its repercussions, in addition to the European Central Bank’s abandonment of the passage of raising interest rates, as do the rest of the global central banks led by the Federal Reserve. Factors will continue to push the euro to lower levels, and the closest to it is currently 1.0455 and 1.0300, respectively.

On the other hand, according to the performance on the daily chart, breaking the resistance levels 1.0790 and 1.1000 will be important in causing a change in the current outlook. Today, the German unemployment rate and the producer price index in the Eurozone will be announced, along with the unemployment rate. From the United States of America, job opportunities and US factory orders will be announced.

Expectations of raising US interest rates strongly during 2022 still support strong gains for the US dollar against the rest of the other major currencies. As a result, the price of the USD/JPY currency pair moved towards the resistance level of 129.40, the highest for the currency pair in 20 years. For four trading sessions in a row, the USD/JPY pair was exposed to profit-taking operations, reaching the level of 127.40 at the time of writing the analysis. Despite the recent performance, the general trend of the currency pair is still bullish and may continue to maintain its gains until the US Federal Reserve announces its monetary policy decisions in the coming days.

Expectations still indicate that the US central bank is ready to raise US interest rates by half a point or more at this meeting.

Highlighting the week leading up to my respective Thursday and Friday releases of US Q1 GDP data and the core PCE price index for March, the Fed’s preferred gauge of US inflation and potential downside risks to the dollar this week. This is because the consensus of economists envisions a second consecutive drop in inflation on a monthly basis, which would fuel speculation about a possible peak in price pressures in the US and could also be strongly influenced by dollar sails over the coming days.

Commenting on this, Jane Foley, FX Analyst at Rabobank said, “The US dollar continues to display well on hawkish comments from the Fed. However, since the publication of 8.5% year-on-year US CPI inflation on April 12, the debate over whether the US has reached “peak inflation” demands attention.

Recently, Federal Reserve Chairman Jerome Powell blessed a half-point rate hike next month and signaled support for more aggressive tightening to curb inflation by noting that he saw advantage in “front-loading” policy moves. “I would say 50 basis points will be on the table for the May meeting,” Powell told a panel hosted by the International Monetary Fund last Thursday in Washington that he shared with European Central Bank President Christine Lagarde and other officials. “We are really committed to using our tools to bring back the 2 percent inflation rate,” he said, referring to the Fed’s target for annual rate increases.

Interest rate futures are pricing in a half-point move in the benchmark lending rate when US central bankers meet on May 3-4 and another half-point hike is priced for the entire month of June. Investors are betting on a third half-point increase for July, and Powell’s colleague at the St. Louis Fed, James Bullard, has opened a discussion about a more aggressive 75 basis point increase if needed.

Despite the recent sell-offs, the general trend of the USD/JPY currency pair is still bullish. The descending channel will not be broken, according to the performance on the daily chart below it, without the currency pair moving towards the support levels 125.00 and 122.20, respectively. On the other hand, and over the same time period, the resistance 128.20 will remain important for expectations of the psychological top 130.00, and the discrepancy in the economic performance and the future of raising interest rates from global central banks will remain factors that support the upward trend of the currency pair.

Today, the USD/JPY pair will be affected by the risk appetite of investors, as well as the reaction to the announcement of the results of the US economic data, the durable goods orders, the US consumer confidence and the US new home sales.

Last week’s trading was the most important for the bears to control the price performance of the EUR/USD currency pair, as the psychological support 1.0800 was finally breached. Expectations for months indicated the possibility of this happening. Bears’ control pushed the EUR/USD towards the 1.0757 support level, the lowest for the currency pair in two years. It closed the week’s trading stable around the level of 1.0811. As mentioned before, the continuation of the weakness factors is represented by the divergence in the economic performance and the future tightening of the central banks’ policy. This is led by the Federal Reserve in favor of the strength of the US dollar, in addition to the continuation of the Russian-Ukrainian war, which directly affects the future of the European economy.

On the economic side, the EUR/USD is trading with the European Central Bank’s vote to keep the benchmark interest rate and the deposit rate unchanged at 0% and -0.5%, respectively. Prior to that, it was announced that the EU’s ZEW survey of economic confidence for April fell from expectations at 0.2, with a negative reading of -43. The German data was impressive across many sectors.

From the US, the Retail Sales Monitor Group for March missed the forecast by 0.6% with a change of 0.5% (MoM). General Retail Sales for this period also came in below 0.2% with -0.1% reading, while Retail Sales outside of Automobiles exceeded the expected change (MoM) by 1% with a 1.1% change. Prior to that, it was announced that the producer price index excluding food and energy exceeded expectations, while the consumer price index excluding food and energy came in below estimates.

Commenting on the performance of the euro-dollar pair, Jordan Rochester, global FX analyst at Nomura Bank, says he expects the collapse in confidence in the eurozone to affect euro portfolio flows further. In short, the macroeconomic bigger picture matters more than politics and as a result the bloc’s single currency is vulnerable to further declines. Accordingly, the analyst adds in a special note, “For us, it is the macro, not Macron, that drives the vision.” And “political uncertainty in France provides another reason why the euro is not likely to trade well in the next two weeks, but it is not the only factor.”

Accordingly, the collapse of confidence in the euro area is likely to affect euro portfolio flows, and “real rates are not rising as fast as the United States, while ETF flows have slowed significantly,” according to the analyst.

He adds that the European Central Bank (ECB) is not likely to raise interest rates faster than the US Federal Reserve is doing, meaning that bond yields will still be skewed in favor of the dollar. This acknowledges the ECB’s view that it will indeed raise interest rates, but there is a risk that “the ECB likely won’t validate July’s pricing of a potential rate hike yet.”

These expectations come before the European Central Bank meeting, which was, according to expectations, kept interest rates unchanged and policy makers acknowledged the rise in inflation but sound caution about the damage to economic growth caused by the Russian invasion of Ukraine.

According to the technical analysis of the pair: In the near term and according to the performance on the hourly chart, it appears that the EUR/USD is trading within a coherent triangle formation. This indicates that there is no clear directional momentum in the market sentiment. Therefore, the bulls will target potential triangle breakout profits at around 1.0831 or higher at 1.0860. On the other hand, the bears will be looking for short-term profits at around 1.0786 or lower at 1.0756.

In the long term and according to the performance on the daily chart, it appears that the EUR/USD is trading within the formation of a sharp descending channel. This indicates a strong long-term bearish momentum in the market sentiment. Therefore, the bears will look to extend the current declines towards 1.0711 or lower to 1.0617. On the other hand, the bulls will target long-term profits at around 1.0897 or higher at 1.1000.