EUR / USD
EUR/USD remains under significant pressure as widening monetary policy divergence between the Federal Reserve and the European Central Bank continues to dominate price action. The Fed's hawkish stance, with markets pricing a 75% probability of a rate increase by September, stands in sharp contrast to the ECB's more cautious approach, where further tightening is being delivered against an increasingly fragile economic backdrop and growth forecasts of only 0.8% for 2026. We continue to see this divergence as the primary driver behind the euro's weakness, with the pair declining to 1.1423 and trading well below the 200 day SMA at 1.17 and the 50 day SMA at 1.16.
From a technical perspective, the daily RSI has fallen to around 30, indicating deeply oversold conditions that could support a short term rebound towards the 20 day SMA near 1.15. However, we expect any recovery to remain limited given the backdrop of resilient US growth, expectations for firm PCE inflation data and subdued eurozone activity. Developments surrounding US Iran negotiations add another layer of uncertainty, as lower oil prices would benefit the eurozone through reduced energy costs but could also diminish safe haven demand for the dollar.
The key level to watch remains support at 1.1420. A sustained break below this area could accelerate losses towards fresh multi month lows below 1.14, particularly if US inflation data reinforces expectations of further Federal Reserve tightening.
USD / JPY
USD/JPY is trading at extreme levels near 161.50 to 161.60 after briefly reaching 161.91 before reversing lower just beneath the July 2024 record high of 162.00. This area now represents major technical resistance and raises the prospect of a potential double top formation. Despite the stretched positioning, the broader backdrop continues to favour the dollar, with the pair trading comfortably above the 20 day SMA at 160.51 and the 200 day SMA at 157.39.
The fundamental story remains centred on yield differentials. Deutsche Bank and Bank of America now expect further Federal Reserve tightening this year, while speculative long dollar positions have climbed to their highest level in sixteen months. In contrast, the Bank of Japan's increase to 1.0% has done little to alter carry trade dynamics, with markets still pricing only a modest chance of one additional increase by year end. We continue to see the pace of Japanese policy normalisation as too gradual to materially narrow the yield gap.
Japanese authorities have intensified intervention rhetoric following discussions between Finance Minister Katayama and US Treasury Secretary Bessent, although the previous intervention campaign has already been completely reversed by renewed dollar strength. A sustained move above 162.00 could open the way towards 162.50 to 163.00, while failure at this level could trigger a corrective move back towards the 20 day SMA near 160.50. While intervention risks are elevated, the path of least resistance continues to favour further gains unless US yields begin to retreat.
GBP / USD
GBP/USD is trading around 1.3240 and remains under pressure, with the pair sitting well below a major resistance cluster formed by the 200 day, 50 day and 20 day SMAs near 1.34. Daily RSI near 37.6 confirms the negative momentum, while the modest rebound from Monday's low at 1.3185 still appears fragile.
Fundamentally, sterling faces a challenging combination of domestic and external headwinds. The Federal Reserve's increasingly hawkish stance and higher US rate expectations continue to support the dollar, while softer UK inflation data has led markets to scale back expectations for further Bank of England tightening. Political uncertainty following Prime Minister Starmer's resignation has added another layer of pressure, with investors increasingly focused on the implications for fiscal policy and gilt market stability.
The pound's longer term vulnerabilities, including weak growth, elevated public debt and the lingering effects of Brexit, continue to limit the scope for a sustained recovery. We expect support at 1.3168 to remain critical in the near term. A break below this level could expose the 1.31 area, while a recovery above 1.3270 would be needed to encourage a move back towards the 1.34 resistance zone. Today's UK flash PMI data could provide the next catalyst for direction.
