EUR / USD
EUR/USD is trading near 1.17, supported by a narrowing interest rate differential as the European Central Bank continues its tightening cycle while the Federal Reserve remains on hold at 3.50% to 3.75%. We see swap markets assigning a very high probability to a 25 basis point ECB rate increase at the 11 June meeting, with further tightening expected through the rest of 2026 as inflation pressures across the eurozone remain persistent. Germany’s harmonised CPI rose to 2.9% year on year in April, reinforcing expectations that the ECB will maintain a restrictive tone.
We expect policymakers to face an increasingly difficult balancing act as the eurozone economy shows widening divergence between sectors. Manufacturing PMI climbed to a near four year high of 52.2, while services activity weakened sharply to 47.4, dragging the composite reading into contraction territory at 48.6. We see this split complicating the ECB’s hawkish narrative, with comments from Christine Lagarde, Luis de Guindos and Philip Lane likely to be closely scrutinised by markets this week.
From a technical and structural perspective, EUR/USD has rallied strongly from around 1.05 in early 2025 towards the 1.17 region, with price holding above key moving averages and finding institutional support around the current confluence zone. We see fading safe haven demand for the dollar following signs of easing tensions in the Middle East, combined with narrowing yield spreads as supportive for the euro in the near term. We expect trade to remain broadly rangebound with a modestly bullish bias between 1.1650 and 1.1793, although the upcoming US nonfarm payrolls report is likely to act as the decisive near term catalyst for relative central bank expectations.
USD / JPY
USD/JPY continues to experience significant two way volatility, driven by the tension between Japan’s ultra low interest rate environment and increasingly forceful intervention efforts from Japanese authorities aimed at defending the psychologically important 160 level. The Bank of Japan has reportedly spent close to $35 billion on intervention measures, while the sharp 270 pip move seen during the Asian session on 6 May highlighted increasingly fragile liquidity conditions. However, we see the impact of intervention fading relatively quickly as markets continue testing policymakers’ resolve.
Technically, the pair is trading around 156 after breaking below both the 50 day and 20 day moving averages near 159. The 200 day moving average is now acting as initial support, while RSI has fallen towards 36, signalling oversold conditions that could support a recovery towards 159 if buyers successfully defend the 155 area. We expect a decisive break below the 200 day moving average to expose further downside towards 152, particularly if the Bank of Japan continues moving towards policy normalisation in the 1.00% to 1.25% range while the Federal Reserve gradually cuts rates towards 3.50% to 3.75%, narrowing the yield gap that has supported prolonged yen weakness.
We see upcoming US nonfarm payrolls data and the 12 May CPI release as critical catalysts for determining the direction of Fed expectations and broader yield differentials. Ultimately, we expect the longer term direction of USD/JPY to depend on whether the Bank of Japan commits more decisively to monetary policy normalisation, risking a broader unwind of the estimated 7.5 trillion yen carry trade, or continues relying primarily on costly intervention measures to stabilise the currency.
GBP / USD
GBP/USD has continued to strengthen, rising around 0.45% to 1.3584, supported by clustered moving averages beneath current price action and an RSI near 58, suggesting there is still room for further gains before conditions become overstretched. We see the pair fundamentally caught between two relatively hawkish central banks, with the Bank of England maintaining a firm stance following its 8 to 1 hold vote, while the Federal Reserve faces growing pressure to remain restrictive as markets increasingly price the possibility of another rate increase next year.
The easing of extreme geopolitical risk premiums following a conditional ceasefire between the US and Iran, alongside the suspension of escort operations near the Strait of Hormuz, has weakened safe haven demand for the dollar and provided modest support for sterling. However, we expect this support to remain fragile given oil prices remain above $100 per barrel and risks surrounding the Strait continue to linger.
Near term directional drivers remain finely balanced. Resistance near 1.3623 continues to cap immediate upside potential, while political uncertainty ahead of the 7 May UK local elections introduces an additional layer of headline risk for sterling. We see the upcoming US nonfarm payrolls report as the key macro catalyst. A weaker labour market reading could compress yield differentials further and allow GBP/USD to challenge the January highs near 1.3848, while a stronger payrolls figure would likely reinforce bullish dollar positioning and trigger a pullback towards the 20 day SMA near 1.3530.
