Weekly EURUSD, GBPUSD, USDJPY Forex Analysis March 01 - March 05, 2021


US Dollar Fundamental Outlook: Rising Treasury Yields Push USD Higher

US Treasury yields continued to rip higher last week, in the process fueling the dollar higher and stocks lower. Fed Chairman Powell wasn’t worried much about the rising yields in his testimony before Congress last week, effectively giving the green light to bond traders to take yields higher.

For the time being, it seems that the US Federal Reserve is more conformable with the tightening effects of rising yields than other central banks, i.e., the ECB, and that should be supportive for the USD in the near-term. The faster vaccine rollout in the US is expected to put the US economy ahead of countries that are slower with the vaccination process, and that should keep the greenback bid versus the currencies of those countries.

The calendar for the week ahead will also give us some exciting events to watch. Starting with today’s ISM’s manufacturing PMI report (4 pm CET), we continue with ISM’s services PMI and ADP’s NFP estimate on Wednesday before finishing the week with the big event – Nonfarm Payrolls on Friday. Economists expect solid job gains for this NFP release, and if they are right, the US dollar is likely to receive a further boost from it.

Euro Fundamental Outlook: EUR Starting to Underperform USD

The euro finished the past week as the 2nd strongest currency among the eight major currencies and only fell against the top-performing US dollar. Still, a large part of the euro’s gains against the safe-haven JPY and CHF were reversed late last week as risk aversion kicked in, again highlighting the importance of risk sentiment as a driver of Fx trends in general.

Indeed, the EURUSD fundamentals continue to weaken compared to 2020 when the pair was moving steadily higher. The EU’s “vaccine lag” effect is likely to be reflected in the euro’s exchange rates soon, where the currency looks set to depreciate versus the leading USD and GBP. However, on a broader basis, the euro may indeed hold up well and even strengthen against the other currencies.

This week’s EUR Fx calendar features a range of economic data that will reveal the state of the economy. The key focus for traders will be on tomorrow’s (Tuesday) flash CPI inflation reports, which are expected at 0.9% and 1.1% y/y for the nominal and the core rates, respectively.

EURUSD Technical Outlook:

EURUSD tried to break through the 1.22 resistance area last week but was fiercely rejected, and thus remaining in its recent trading range between 1.20 and 1.22. Importantly, the rejection comes with a bearish shooting star candlestick pattern (inverted hammer) on the weekly chart, which turns the technical picture slightly dovish here.

Risks for tests below 1.20 have now significantly increased. However, let’s not be so fast in claiming that a breakout below 1.20 is a given. This support in the 1.20 area is rock solid and will not give way easily. Under the current circumstances, a weekly close below 1.19 is needed to confirm a bearish breakout of the 1.20 support area.

If 1.20 breaks, then the next key support zone lower is in the 1.16 area.

British Pound Fundamental Outlook: GBP Corrects After Overshooting to the Upside

The volatile nature of the pound sterling showed its face again last week. The currency was rising rapidly in the first part of the week but then got hammered down on Thursday and Friday as Fx trends reversed. There were no particular UK-related causes for the reversal of GBP’s gains, but rather the move looks like a natural consequence of the rapid appreciation in recent days and weeks.

The main event that traders will watch on the GBP calendar this week is the annual UK budget release. Investors expect the furlough scheme to be extended but will watch for statements on tax rates, given the recent talk of a possible tax hike in the future as a measure to counter the large amounts of debt that was and is still being created to fight the COVID pandemic.

Several Bank of England MPC members will also speak throughout the week, whose comments will be watched by Fx traders for any clues on future BOE monetary policy.

GBPUSD Technical Outlook:

GBPUSD moved swiftly higher last week, even exceeding our expectations for the pace of the upside move. However, cable indeed got rejected as soon as it reached the major 1.42 – 1.43 resistance area. The reversal was sharp, and a bearish shooting star pattern has formed here too. While the downside correction is likely to extend in the near-term, the strength of the overall bullish trend suggests this is still likely to be a pause to the uptrend rather than a reversal.

The first support area to the downside is 1.3750. But the uptrend won’t be seriously challenged until the 1.36 – 1.35 support area, which should be the key area that needs to hold for the longer-term bullish dynamics to remain intact.

Japanese Yen Fundamental Outlook: Risk Sentiment Key for JPY Pairs’ Direction

The safe-haven Japanese yen moved to the forefront last Thursday and Friday as risk sentiment turned down, taking lower risky assets and currencies. Though the yen still underperformed the US dollar, which directly benefited from rising Treasury yields.

While the outlook for the other currencies is relatively clear, it’s trickier to assess what will happen with the yen over the coming weeks. If risk appetite returns, the yen may become the weakest currency of the majors again. But if risk aversion persists, USDJPY may also suffer and turn down. Nonetheless, as long as US Treasury yields keep rising while risk sentiment remains benign (without big stock market sell-offs), the path of least resistance for the USDJPY pair should be higher.

USDJPY Technical Outlook:

This week we are taking a look at the weekly USDJPY chart for a change. On the daily chart, the pair is still trading inside of the ascending channel that we draw attention to a couple of weeks ago.

The weekly chart here can give us clues on how far to the upside USDJPY can go. It can be immediately seen that USDJPY is likely to experience some strong resistance at levels around 110.00 and above, where it was rejected last year. Ahead of it, resistance is likely to exist in the 108.00 area, albeit not as significant as the one at 110.00.

The break above 106.00 last week was an important milestone, and this level should be support if the price comes back to it. Below it, 105.00 again stands as a major support area, although it failed to hold in late 2020.