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Daily FX Report

Political Risk Keeps Dollar in FX Driver’s Seat

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EUR / USD

The EUR/USD strengthened to 1.669 as the dollar weakened, reflecting heightened uncertainty surrounding US monetary policy leadership and institutional stability. Indeed, the Department of Justice opened a criminal investigation into Fed Chair Jerome Powell, focusing on his testimony about the Fed’s Washington headquarters renovation and triggering rare legal scrutiny of a central bank leader. Powell has pushed back strongly, arguing that the investigation is a pretext tied to pressure for lower interest rates and a broader attempt to influence the Fed's independence. Concurrently, the ECB maintains a cautious policy stance favouring stability.

From a technical perspective, EUR/USD is trading around 1.1670, just below the 20-day SMA at 1.1726, with the daily RSI at 44 reflecting recent downward pressure. The pair remains supported above the 200-day SMA near 1.1580, which has proven to be a significant floor. However, failure to reclaim the overhead moving averages suggests buyer hesitancy.

We expect euro strength to extend through 2026, driven by improved Eurozone consumer confidence at six-month highs, with a bullish scenario requiring buyers to push through the 1.1700 resistance toward the 1.1764 weekly high.

USD / JPY

USD/JPY continues to exhibit bullish momentum, driven primarily by significant monetary policy divergence between the Bank of Japan and the Fed. The BoJ's cautious approach to rate normalisation, with additional tightening not anticipated until the second half of 2026, contrasts sharply with the Fed's restrictive stance. This interest rate differential has reinvigorated carry trade flows, creating persistent downward pressure on the Japanese yen.

Technical indicators reinforce the bullish fundamental backdrop, with USD/JPY trading decisively above all key moving averages—the 20-day SMA at 156.70. The pair climbed to approximately 158.12 with the daily RSI at 66, indicating strengthening momentum without reaching overbought territory. Should dollar strength persist, USD/JPY could target the yearly peak near 158.80; however, a break below the 20-day SMA at 157 would signal a potential bearish reversal toward lower support levels. We expect continued pressure on the yen from the fundamental standpoint.

GBP / USD

GBP/USD jumped higher on the back of a weaker dollar, but the upside was capped by the 20 SMA at 1.3464, suggesting the continued prevalence of technical indicators for the pair’s direction. The sterling's recent rebound reflects broader dollar weakness driven by concerns regarding Federal Reserve independence following the Department of Justice's investigation into Fed Chair Powell, with markets pricing this institutional risk as potentially inflationary.

The pound derives support from the interest rate differential, as the Bank of England maintains a more restrictive policy stance relative to the Fed's recent easing cycle, enhancing sterling's attractiveness to yield-seeking investors. However, structural resistance persists as shared inflationary pressures from energy and tariff channels limit the Bank of England's ability to diverge significantly from U.S. monetary policy, suggesting technical dynamics will dominate short-term GBP/USD price action over traditional interest-rate differentials. In particular, resistance at 1.3550 presents a significant hurdle; a jump above it would require signals beyond the dollar weakness, in our opinion.

Economic Calendar 

13012026

Contents

Disclaimer

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This report was prepared with the assistance of artificial intelligence.

A large number of views are being generated at all times and these may change quickly. Any valuations or underlying assumptions made are solely based upon the author’s market knowledge and experience.

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