Market update: US dollar forecast, eyes on Q4 GDP - analysis of EUR/USD, USD/JPY, GBP/USD setups

The US dollar retreated on Wednesday despite better-than-anticipated PMI results, but the tide could turn in its favor over the coming days, especially if key US economic data continues to surprise to the upside. With that in mind, it is important to keep an eye on the fourth-quarter gross domestic product numbers set to be released on Thursday.

In terms of estimates, economic activity is forecast to have expanded by 2% at an annualized rate during the fourth quarter, following a 4.9% increase in Q3. Although GDP is backward-looking, it can still offer valuable information on the health of the economy. For this reason, traders should follow the report closely, paying particular attention to household expenditures, the main engine of growth.

Economic calendar

With consumer spending holding up better than expected thanks in part to a strong labor market and rising confidence levels, it would not be surprising to see another buoyant GDP report. This scenario could further reduce the odds of a Fed rate cut in March and push traders to scale back overly dovish expectations for the FOMC’s policy path, creating a more constructive backdrop for the US dollar.

EUR/USD technical analysis

After a subdued performance earlier in the week, EUR/USD rebounded on Wednesday, bouncing off the 200-day simple moving average and approaching the 1.0900 handle. If gains accelerate in the coming days, technical resistance appears at 1.0920/1.0935, and 1.0975 thereafter. On further strength, the crosshairs will be 1.1020.

On the other hand, if sentiment shifts back in favor of sellers and the pair takes a turn to the downside, the 200-day SMA near 1.0840 will be the first line of defense against a bearish assault. Prices may find stability in this area on a pullback before mounting a comeback, but in the event of a breakdown, we could see a move towards 1.0770, followed by 1.0710 (trendline support).

EUR/USD daily chart

GBP/USD technical analysis

GBP/USD also climbed on Wednesday, but failed to clear resistance at 1.2770. Traders should keep a close eye on this technical ceiling in the trading sessions ahead to see if it contains the bulls. If it does and prices are ultimately rejected to the downside, we could be looking at a possible pullback towards 1.2680. Further losses from this point onward may shift focus towards 1.2600.

On the contrary, if the cable prolongs its advance and decisively surpasses 1.2770, we will have before us a bullish signal derived from the confirmation of the symmetrical triangle in development since the middle of last month. In this scenario, GBP/USD could first rally towards 1.2830 before starting the next leg of the upward trend towards 1.3000.

GBP/USD daily chart

USD/JPY technical analysis

USD/JPY sold off on Wednesday, but managed to finish the day off its worst levels and above the 100-day simple moving average located at near 147.40. There's a potential for prices to find stability in this zone in the coming days before continuing their upward trend. Yet, if a breakdown occurs, the possibility of retracement towards the 146.00 handle cannot be dismissed.

On the flip side, if the bulls regain control and propel USD/JPY higher, technical resistance can be spotted at 149.00. On further strength, all eyes will be on the psychological 150.00 mark. Although a retest of the area is within the realm of possibility, the pair may not be able to sustain these levels for an extended period of time, given the risk of Tokyo intervening in FX markets to support the yen.

USD/JPY daily chart

_{This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.}