EUR / USD
EUR/USD remains under sustained downward pressure as widening monetary policy divergence between the Federal Reserve and the European Central Bank continues to dominate price action. The Fed's decision to maintain rates at 3.50% to 3.75%, alongside projections for further tightening, stands in sharp contrast to the ECB's limited scope for additional increases given rising recession risks across the eurozone. With the composite PMI slipping to 49.5 and growth momentum deteriorating, we continue to see the macro backdrop favouring the dollar. Robust US data, including manufacturing PMI at 55.7 and CPI running at 4.2% year on year, further reinforces the dollar's fundamental advantage.
From a technical perspective, the pair has fallen around 0.48% over the past 24 hours to trade near 1.1368 and remains well below all major moving averages, including the 200 day SMA at 1.17 and the 20 day SMA at 1.15. Daily RSI has declined to around 26, highlighting deeply oversold conditions and increasing the possibility of a short covering rally. However, we do not see this as sufficient to alter the broader bearish structure. Additional support for the dollar from safe haven flows amid equity market volatility and uncertainty surrounding the US Iran framework continues to weigh on the single currency.
Thursday's Core PCE inflation report is likely to be the next major catalyst. A firm reading would reinforce the higher for longer narrative and could accelerate losses towards 1.13 and below, while a softer print may provide only temporary relief for an increasingly oversold euro.
USD / JPY
USD/JPY continues to trade close to multi decade highs near 162, just below the all time high reached in July 2024. The primary driver remains the widening policy divergence between the Federal Reserve and the Bank of Japan. Markets are assigning around a 70% probability of another Federal Reserve rate increase by September, while the roughly 275 basis point gap between US and Japanese policy rates continues to encourage carry trade demand despite the Bank of Japan's increase to 1.0% in June.
Structural capital outflows also remain a significant headwind for the yen. Household portfolio diversification and outbound foreign direct investment continue to exceed Japan's current account surplus and maintain persistent downward pressure on the currency.
Technically, the pair remains comfortably above all major moving averages, with the 20 day SMA at 161, the 50 day SMA near 159 and the 200 day SMA around 157. Daily RSI near 74 indicates increasingly overbought conditions and suggests the market may be vulnerable to a corrective pullback. Nevertheless, we continue to see the broader trend favouring further gains while the yield differential remains so wide.
A sustained break above 162 could open the way towards 162.50 and potentially 165, as some former Bank of Japan policymakers have suggested. However, intensifying intervention rhetoric or any moderation in Federal Reserve expectations could trigger a pullback towards the 20 day SMA near 161.
GBP / USD
GBP/USD remains under considerable pressure, having fallen around 2.5% over the past month to trade near 1.3196. The pair continues to suffer from a combination of broad based dollar strength and domestic UK weaknesses. Following the hawkish June FOMC meeting, markets are now pricing more than a 70% probability of a September rate increase, lifting the dollar to its strongest levels since May 2025. In contrast, the Bank of England's decision to leave rates unchanged at 3.75% and signal an extended pause has removed an important source of support for sterling.
The technical picture also remains negative. The pair is trading well below all major moving averages, with the 50 day and 200 day SMAs clustered around 1.3400 and acting as significant overhead resistance. Daily RSI near 35 suggests conditions are becoming oversold and could support periods of short covering, although we do not yet see evidence of a sustained recovery.
Fundamentally, sterling continues to face several challenges. Inflation remains elevated at 2.8% and services inflation is still accelerating, while contracting PMI data and renewed political uncertainty following the Prime Minister's resignation have further undermined investor confidence. Net speculative short sterling positions have also risen to their highest level since March.
Thursday's US PCE inflation report is likely to be the pivotal event for the week. A stronger than expected reading would reinforce the hawkish Federal Reserve narrative and could push GBP/USD below support at 1.3180, exposing the November 2025 low near 1.3014. A softer outcome could allow a recovery towards the 1.3300 area, although the broader balance of risks remains tilted in favour of the dollar.
