EUR / USD
EUR/USD continued to weaken, breaking below the psychological 1.1500 support level to reach 1.1485, primarily driven by the dollar's strength as markets continue to price out expectations of a Fed cut in December. The euro's weakness is fundamentally anchored in the widening interest rate differential between the US and the Eurozone. The ECB's apparent approach toward ending its tightening cycle, amid sluggish Eurozone growth and moderating inflation, further compounds the euro's challenges.
Despite the daily RSI reading of 30.2 indicating oversold conditions and suggesting a potential technical bounce, the structural headwind from the persistent rate gap continues to weigh on the euro. Market sentiment remains firmly in favour of the dollar. However, the upside may be limited due to the ongoing US government shutdown, which is negatively impacting the country's economic and political outlook despite a more hawkish Fed.
The balanced institutional positioning following recent euro weakness could provide opportunities for quick rebounds on disappointing US data; however, a sustained recovery would likely require either a significant deterioration in US economic performance or a marked improvement in Eurozone growth prospects - something we do not anticipate seeing in the near term. The next significant support level is at 1.1400, a July low, which we expect the pair may cautiously test as markets continue to adjust their expectations for a Fed rate cut.
USD / JPY
The USD/JPY currency pair weakened to 153.67 as markets grew more cautious regarding the critical 150.00 mark, a level thought to be sufficiently close to initiate considerations of currency intervention. Still, with the BOJ's persistently dovish stance, coupled with Prime Minister Takaichi's support for accommodative policy, a substantial interest rate differential of over 3% remains against the US dollar, which fundamentally supports the pair's strength.
Recent price action indicates that the pair is finding strong support at the 20-day moving average of 152.40, with technical indicators suggesting a potential for another attempt to approach the 155.00 level. The fundamental outlook remains bearish for the yen, particularly as markets now assign only a 47% probability of a December rate hike, while consensus builds around delayed policy normalisation extending into early 2026.
Technical analysis suggests potential for further upside movement above the 154.00 resistance level, though this advance may be tempered by increasing verbal intervention from Japanese officials and the growing possibility of direct market intervention as the pair approaches critical levels.
GBP / USD
The GBP/USD fell towards an April low of 1.3000, as ongoing fiscal uncertainty in the UK offset a less dovish BOE trajectory, with interest rate cut expectations pushed further into December. The upcoming Autumn Budget presents a looming risk, with potential tax hikes and fiscal tightening to address a £22 billion fiscal gap, while services inflation remains elevated at 4.7% and core CPI at 3.5%.
Technical analysis reveals severe weakness in the pair, having broken through multiple support levels, including the 200-day SMA at 1.3258, with the pair reaching concerning lows of 1.301. However, the severely oversold conditions, indicated by an RSI reading of 21.87, suggest a potential for a technical bounce. Nevertheless, historical patterns show that this may not guarantee an immediate reversal, particularly given the UK's position as "the most stagflationary economy in the developed world."
