EUR/USD and GBP/USD Forecast: Dollar Strength Keeps Pressure on Euro and Pound

What To Know

• EUR/USD is testing the 1.16 area, a key zone where traders are watching for signs of exhaustion.
• A break above 1.1650 could open the door toward the 1.18 level if the US dollar weakens.
• GBP/USD faces resistance near the 200-day EMA, limiting upside momentum.
• Ongoing risk-off sentiment and geopolitical tensions support the US dollar.
• Upcoming central bank decisions from the Federal Reserve and Bank of England could drive volatility.

The markets continue to see a lot of “risk off” attitude scenario, as we are looking to determine whether or not we are going to see a situation where people are going to be able to take a risk, or whether or not we are going to see continued fear. With this, the US dollar remains the most important asset.

EUR/USD

At this point, I do believe that the Euro is probably going to end up being one of the weaker currencies, mainly due to the fact that the central bank is on hold and of course more importantly Europe is going to have issues with energy.

The backdrop of course is one where people are running away from risk in general, although the last day or so has seen a return to risk appetite, probably short-lived as the US dollar is considered to be a safety currency and of course we have to factor in the idea that the Federal Reserve is likely to stay tighter for longer. In fact, they’re only expected to cut rates once this year and probably not till December.

This is a game that we’ve been playing for 18 months where the market gets excited and they start selling off the dollar because they think the Fed is going to come riding to the rescue by cutting rates and then it keeps getting pushed back. I’ll be watching this area right around 1.16 for signs of exhaustion. If we get it, I’m a seller. If we break above 1.1650, then I think you could have a return to 1.18, but we would need to see general US dollar weakness and perhaps more of a risk-on type of attitude. Maybe a ceasing of the hostilities in the Middle East could kick that off.

GBP/USD

The British pound initially pulled back a bit during the session, but it looks like the 200-day EMA is now going to be a little bit of a barrier. The Bank of England doesn’t look likely to change its interest rates, and it will remain somewhat firm, so that I think it should drive Sterling higher, maybe not against the US dollar like it will other currencies.

I’d be looking to short somewhere near the 50-day EMA. Remember, we have central bank decisions tomorrow in the US, Thursday in England, so a day or two of patience might be necessary here. But as long as there are geopolitical risks, I still think the US dollar’s probably the currency to own. However, I would rather be short of the Euro than the Pound.

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