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The euro to dollar exchange rate (EUR/USD) could soon cross 1.19.
Dollar weakness is driving the FX market, with a significant drop in USD/JPY infecting other USD pairs and helping EUR/USD to the cusp of 1.19 on Monday.
"The Japanese yen ended Friday's trading as the strongest currency among the G10 and continues to appreciate this morning. The movement was driven by speculation that the Bank of Japan was about to intervene in the foreign exchange market to support the currency," says Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank.
Intervention means yen are bought and dollars are sold, with the resultant USD selling pressure lifting all other USD crosses, such as EUR/USD and GBP/USD. With the potential for further USD/JPY decline amidst intervention fears and intervention itself, further EUR/USD gains are likely.
That being said, we're seeing FX volatility make a big return and that means those watching the market should be prepared for two-way risks.
Technical conditions are nevertheless in favour of EUR/USD upside as the pair is above all its major moving averages and the momentum indicators we follow are comfortably positive.
The next target from here is the 2025 high at 1.1918, and then you're targeting the stop losses layered in the run-up to 1.20.
Pullbacks would initially target 1.1844, as we would imagine the December high would act as support.
Potential triggers to a pullback would include this week's Federal Reserve policy decision, due Wednesday.
"The January FOMC meeting is likely to be uneventful," says David Mericle, an economist at Goldman Sachs. "Chair Powell is likely to emphasise that the FOMC has just delivered three cuts that should help to stabilise the labour market and is well positioned for now while it assesses their impact."
Such a wait-and-see message could do enough to disappoint a market hoping that the Fed will signal a clear intent to deliver further rate cuts, which could help the dollar rebound and EUR/USD pare its recent rally.
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