EUR / USD
EUR/USD is currently testing the 1.18 level as the interest rate differential between the European Central Bank and the Federal Reserve continues to narrow. The ECB has maintained a tightening bias while the Federal Reserve keeps rates steady between 3.50% and 3.75%. Swap markets are pricing close to an 80% probability of a 25 basis point ECB rate increase at the 11 June meeting, which would lift the main refinancing rate towards 2.4%. Hawkish commentary from policymakers including Isabel Schnabel and Joachim Nagel has reinforced expectations that further tightening may still be required should the energy shock broaden further.
Technically, the pair is trading near a key inflection point, with price compressing around the confluence of the 200 day SMA, 30 day VWAP and 20 day SMA near 1.17, a setup that often precedes a stronger directional move. Economic data across the eurozone continues to present a mixed picture. German factory orders rose 5% month on month in March, although weaker retail sales and a sharp decline in construction PMI to 41.7 continue to complicate the ECB’s policy outlook.
Geopolitical developments surrounding the US Iran situation have become the dominant driver for broader market sentiment. Earlier optimism surrounding a potential diplomatic agreement supported the euro, although renewed military exchanges in the Persian Gulf have revived safe haven demand for the dollar. Attention now turns firmly towards today’s US nonfarm payrolls report. A softer labour market reading would likely reinforce expectations for future Federal Reserve easing and extend euro gains, while persistently elevated oil prices above $100 per barrel linked to disruption around the Strait of Hormuz could ultimately strengthen the euro further by forcing the ECB into a more aggressive tightening stance.
USD / JPY
USD/JPY is trading near 156.79, remaining well below its major moving averages, including the 20 day SMA at 158.42, the 50 day SMA at 158.92 and the 30 day VWAP at 158.65, confirming the broader downtrend that has developed since the late April peak at 160.65. The 200 day SMA near 155.65 is now acting as critical long term support just below current price levels. Daily RSI near 39 continues to reflect bearish momentum, although the pair’s proximity to major support suggests markets may be approaching an important turning point where either a recovery towards the 158.40 to 158.65 resistance zone or a break lower towards 155.65 becomes increasingly likely.
Fundamentally, the backdrop remains dominated by Japan’s large scale intervention campaign, with an estimated 10 trillion yen, equivalent to roughly $64 billion, reportedly deployed since late April. These efforts continue to run against the structural challenge created by the roughly 300 basis point interest rate differential between the Federal Reserve’s 3.50% to 3.75% policy range and the Bank of Japan policy rate of 0.75%. Markets are currently pricing around a 72% probability of a Bank of Japan rate increase in June, supported by improving real wage growth, while the upcoming visit of Scott Bessent to Tokyo adds further diplomatic pressure for faster policy normalisation.
Taken together, these technical and macroeconomic forces suggest Japanese authorities are effectively attempting to cap USD/JPY through intervention while the carry trade differential continues to provide underlying support. The broader resolution is likely to depend on whether the Bank of Japan delivers the anticipated June rate increase or whether rising geopolitical tensions and elevated oil prices, which worsen Japan’s trade balance, ultimately overwhelm intervention efforts and force a renewed test of the 200 day moving average support.
GBP / USD
GBP/USD continues to navigate a difficult backdrop shaped by geopolitical tensions, diverging monetary policy expectations and rising domestic political uncertainty in the UK. The pair is trading near 1.3580 after reversing sharply from resistance around 1.3624. Renewed tensions linked to the US Iran conflict have revived safe haven demand for the dollar, pushing sterling back towards 1.3555 and leaving the currency on track for its first weekly decline since March. Domestic political uncertainty surrounding expected Labour losses in local elections has also added additional pressure.
The relatively hawkish stance of the Bank of England compared with the Federal Reserve continues to provide longer term support for sterling, as persistent UK inflation and softer US economic data maintain expectations that Bank of England rate cuts may arrive more slowly than those from the Federal Reserve. However, this support is increasingly offset by concerns surrounding UK fiscal sustainability, elevated gilt yields and weaker foreign demand for UK government debt.
From a technical perspective, GBP/USD remains comfortably above the 50 day SMA near 1.34 and the 30 day VWAP around 1.35, both of which continue to act as important support levels. Nevertheless, repeated failures near 1.3624 resistance alongside a neutral RSI near 57 suggest upside momentum is beginning to fade. Today’s US nonfarm payrolls report, with consensus expectations pointing towards a sharp slowdown to around 62,000 jobs, is likely to act as the key near term catalyst. A weaker than expected reading could renew dollar weakness and support sterling, while a stronger payrolls figure would likely place fresh pressure on the pound and increase volatility heading into the weekend.
