EUR / USD
Based on recent developments, the EUR/USD outlook is shaped by diverging monetary policy stances and evolving trade dynamics. The European Central Bank maintained rates steady last week while adopting a somewhat hawkish tone, though concerns persist about potential undershooting of their 2% inflation target, especially if euro strength continues.
The Federal Reserve is widely expected to hold rates at 4.25-4.50% this week, with officials emphasising patience amid uncertainty around tariff impacts on inflation, though markets are pricing in rate cuts starting September. The newly announced US-EU trade deal, setting a 15% tariff rate, while higher than initial expectations, removes a key source of uncertainty and may provide support for the euro.
Economic data shows the eurozone economy stagnating with Q2 GDP expected at 0% growth, while US GDP likely rebounded to 2.4% growth in Q2, though underlying demand remains modest. Labour markets are showing signs of cooling in both regions, with the US unemployment rate expected to tick up to 4.2% in July. This suggests that the focus is likely to shift to macroeconomic fundamentals rather than tariff-induced uncertainty, with the US economy in a strong position, which could lift some of the dollar pressures in the near term.
USD / JPY
USD/JPY finds itself at a crucial juncture, with the upcoming Bank of Japan meeting on Wednesday potentially serving as a significant market catalyst, as the central bank is expected to maintain rates at 0.5% while possibly revising inflation forecasts. Recent Japanese economic indicators showing weakness, coupled with political uncertainty following the ruling coalition's electoral setback, could complicate the BOJ's path toward policy normalisation.
Technical analysis reveals the pair trading near 147.66, positioned between critical levels with the 200-day moving average at 149.63 serving as resistance and the 100-day moving average at 145.69 providing support. The recently announced US-Japan trade deal, implementing a 15% tariff on Japanese exports, has reduced trade uncertainty and maintained market expectations for approximately 20 basis points of BOJ rate hikes in 2025. A potential breakout above 149.04 could trigger momentum toward the January peak of 158.55, while the Federal Reserve's upcoming meeting and forward guidance will be crucial in determining the dollar's strength and the pair's trajectory.
GBP / USD
GBP/USD faces significant downward pressure as diverging monetary policies between the Bank of England and the Federal Reserve create a challenging environment for sterling. The Bank of England's expected pivot toward rate cuts, driven by falling UK inflation and stagnating growth, contrasts sharply with the Fed's more hawkish stance, which is supported by robust US economic data.
Technical analysis reveals bearish sentiment, with the pair trading below critical levels of 1.35 as resistance, while key support levels at 1.338 and 1.330 remain vulnerable. The UK's economic fundamentals present additional concerns, with flatlining GDP and contracting PMI data in both services and manufacturing sectors suggesting continued weakness.
Major financial institutions have adopted increasingly bearish positions on sterling, as evidenced by growing short positions in institutional trading data, while the IMF's specific warnings about UK fiscal imbalances and productivity challenges further compound the negative outlook. The technical and fundamental analysis collectively suggest continued pressure on GBP/USD, with potential for further downside movement in the near term.
