After the European Central Bank decision, why does EUR/USD keep falling? The exchange rate trend depends entirely on these points

The Central Bank Decision Sparks Exchange Rate Fluctuations and Market Reshuffle

Last week, the foreign exchange market experienced frequent volatility. The US dollar index rose by 0.22%, the Japanese yen slightly declined by 0.01%, but the euro performed the weakest, falling 0.40% against the dollar, with the Australian dollar bucking the trend and rising by 0.9%. Behind this adjustment, the influence of central bank decisions cannot be overlooked.

On September 14, the European Central Bank announced its interest rate decision, maintaining a 25 bps rate hike, but the subsequent statement signaled a shift in tone. Central bank officials explicitly stated that key interest rates had reached a level that could be maintained, implying that the current rate hike cycle was coming to an end. This shift put pressure on the euro.

Economic Outlook Downgrade Creates Contrasts Between US and Europe

Adding to the pressure, the European Central Bank also downgraded its economic forecasts for the next three years. The 2023 GDP growth forecast was lowered from 0.9% to 0.7%, 2024 from 1.5% to 1%, and 2025 from 1.6% to 1.5%. Meanwhile, inflation forecasts were revised upward—projecting a 3.2% inflation rate in Europe for 2024 (up from 3.0%), indicating a scenario of slowing economic growth but persistent high prices, raising stagflation risks.

In contrast, US economic data remains robust. Retail sales in August increased by 0.6% month-over-month, well above the expected 0.1%; the Producer Price Index (PPI) also grew by 1.6% year-over-year, exceeding the forecast of 1.3%. The strong economy continues to support a strengthening dollar.

When Will EUR/USD Bottom Out? Technical Signals Provide Clues

On September 14, EUR/USD plummeted 0.8% in a single day, reaching a new low. From a technical perspective, the exchange rate has broken below previous support levels and remains in a downtrend channel. However, the RSI indicator is approaching oversold territory, suggesting a potential short-term rebound.

This week’s focus is on the Federal Reserve meeting. If the Fed signals dovishness, EUR/USD may experience a technical rebound. In the medium term, the risk of European recession continues to rise, while US growth remains steady. This fundamental divergence is likely to keep pressuring EUR/USD lower. Resistance is expected at 1.077, with support at 1.060.

USD/JPY: Central Bank Policies as Key Variables

The yen’s movement is also worth watching. Last week, USD/JPY initially declined then rebounded. The initial drop was influenced by hawkish comments from Bank of Japan Governor Ueda, but the pair later recovered. Officials later clarified that the Governor’s remarks were not policy signals, merely reiterating that decision-making involves weighing various risks.

However, the Bank of Japan still recognizes strong inflation momentum, suggesting that the quarterly inflation outlook in October may be revised upward. Deutsche Securities’ chief economist predicts that the BOJ will end its YCC policy in October and possibly conclude the negative interest rate policy by January next year.

Nevertheless, the Japanese government’s urgency to intervene to prevent yen appreciation has diminished. From exports, overseas earnings, to investment income, a weaker yen benefits Japan’s economy overall. Therefore, the BOJ and Ministry of Finance are inclined to adopt verbal interventions to avoid rapid yen appreciation and capital flow risks.

Weekly Outlook: Dual Central Bank Meetings Drive Exchange Rates

This Friday, the Bank of Japan will announce its September interest rate decision, with market expectations for no policy change. Meanwhile, the Federal Reserve meeting will be another key trigger for USD/JPY. If USD/JPY quickly breaks through the 148 level, Japanese authorities may again implement verbal interventions.

From a technical standpoint, USD/JPY remains above the 21-day moving average, indicating a bullish signal, but the MACD shows a tug-of-war between bulls and bears, with some reversal risk. Expect USD/JPY to oscillate at high levels this week, with resistance at 148.5 and support at 146.5.

Key Points Investors Should Watch

In terms of euro outlook, economic fundamentals are becoming the dominant factor in pricing. The widening growth gap between Europe and the US will continue to be bearish for the euro. As for USD/JPY, close attention should be paid to the policy stances of the Federal Reserve and the Bank of Japan, as well as any intervention actions by Japanese authorities. Both major currency pairs are awaiting clear signals from this week’s central bank meetings.