EUR / USD
EUR/USD remains under sustained bearish pressure, trading near 1.1362 after falling to a session low of 1.1325, as widening monetary policy divergence between the Federal Reserve and the European Central Bank continues to dominate price action. The Fed's hawkish hold at 3.50% to 3.75%, coupled with the prospect of further tightening, contrasts sharply with the ECB's more cautious stance following its modest 25 basis point increase to 2.25%. The resulting transatlantic rate differential continues to attract capital towards dollar denominated assets, with two year US Treasury yields rising to 4.15% while equivalent German yields have declined.
The eurozone's deteriorating economic backdrop offers little support for the single currency. The economy contracted by 0.2% in the first quarter, flash June composite PMI readings have remained below 50 for a third consecutive month, and Germany's private sector activity has fallen at its fastest pace since 2024. Meanwhile, US inflation remains sticky at 4.2%, with core PCE expected to remain elevated around 4.1%, reinforcing expectations that the Fed will keep policy restrictive for longer. We also see lower oil prices reducing the ECB's justification for additional tightening.
From a technical perspective, daily RSI near 26.5 highlights deeply oversold conditions, although the pair continues to trade well below all major moving averages, including the 200 day SMA at 1.17, the 50 day SMA at 1.16 and the 20 day SMA at 1.15. While there appears to be some buying interest around 1.1325, a decisive break below this support could expose the 1.1300 area and potentially lower levels. We continue to see the broader balance of risks favouring further euro weakness unless there is a material shift in Federal Reserve rhetoric or a meaningful improvement in eurozone economic data.
USD / JPY
USD/JPY is pressing against the critical 162 level, its July 2024 record high, supported by a persistent 275 basis point yield differential between the United States and Japan. The Federal Reserve's hawkish outlook, with markets assigning more than a 67% probability of a September increase, continues to support the dollar, while the Bank of Japan's June move to 1.0% has done little to alter the underlying carry trade dynamics.
Political considerations also continue to constrain the Bank of Japan. Prime Minister Takaichi's administration has openly advocated policies that support domestic demand, limiting the scope for aggressive monetary tightening. As a result, we continue to see the policy gap as a major structural driver of yen weakness.
Technically, the pair remains stretched, with daily RSI at 76 and spot trading nearly 3% above the 200 day SMA at 157.47. Institutional activity has been concentrated around 161.75, suggesting the market is consolidating beneath an important resistance level. Intervention risk remains elevated, particularly following discussions between Finance Minister Katayama and US Treasury Secretary Bessent, although previous interventions have ultimately failed to reverse the trend.
A decisive break above 162 could trigger another leg higher towards uncharted territory, particularly if Friday's US PCE inflation data surprises to the upside. Conversely, a softer inflation reading or direct intervention could trigger profit taking towards the 20 day SMA near 160.70. For now, we continue to see the underlying backdrop favouring further gains in USD/JPY.
GBP / USD
GBP/USD remains under pressure as broad based dollar strength and domestic economic challenges continue to weigh on sterling. The pair has struggled to sustain rebounds and remains below the major moving average cluster around 1.34, reflecting a persistently negative technical backdrop.
The Federal Reserve's increasingly hawkish stance continues to support the dollar, while the Bank of England remains constrained by weak growth and elevated inflation. We continue to see the UK economy facing a difficult mix of sluggish activity, deteriorating business confidence and persistent fiscal concerns, all of which limit the scope for sterling to recover meaningfully.
Technically, momentum remains weak and the pair continues to trade close to recent lows. Support near 1.3180 remains critical, with a sustained break below this level opening the way towards the November 2025 low near 1.3015. On the upside, any recovery is likely to face resistance around the 1.3300 to 1.3400 area.
Friday's US PCE inflation report remains the key event risk. A stronger than expected reading would reinforce the higher for longer narrative and could extend sterling's losses, while a softer print may allow for a short covering rebound. However, we continue to expect rallies to remain limited while the fundamental backdrop remains firmly in favour of the dollar.
