EUR / USD
EUR/USD remains under sustained bearish pressure, trading near 1.1374 and firmly below all major moving averages, with the 200 day SMA at 1.17, the 50 day SMA at 1.16 and the 20 day SMA at 1.15 continuing to cap any recovery attempts. The daily RSI around 29 highlights deeply oversold conditions, although the broader technical structure remains decisively negative.
The fundamental backdrop continues to favour the dollar. The Federal Reserve remains firmly in restrictive territory at 3.50% to 3.75%, with markets assigning around a 62% probability of a September rate increase, while the ECB is tightening into an increasingly fragile economy with growth forecasts for 2026 reduced to just 0.8%. We continue to see this widening policy divergence as the dominant driver of the pair.
Capital flows also remain heavily skewed towards the United States. More than USD 340 billion has flowed into US equities this year, supported by strong consumer spending and continued investment linked to the AI theme. In contrast, eurozone demand remains subdued and private sector activity continues to deteriorate. This divergence is increasingly encouraging investors to favour dollar denominated assets, with some major banks now highlighting the risk of EUR/USD moving towards 1.10 should the Fed maintain its hawkish stance.
From a technical perspective, buyers have thus far defended support around 1.1329 and the extremely oversold RSI leaves room for a corrective rebound towards the 1.15 area, where the 20 day SMA and VWAP converge. However, we continue to expect any recovery to remain limited unless there is a meaningful shift in the US inflation or growth outlook.
USD / JPY
USD/JPY continues to trade near forty year highs around 161.6 to 161.8, underpinned by the substantial interest rate differential between the United States and Japan. Persistent US inflation and resilient consumer spending have reinforced expectations that the Federal Reserve will keep policy restrictive, with markets still pricing more than a 60% probability of a September increase.
On the Japanese side, the Bank of Japan has raised rates to 1%, its highest level in more than three decades, and Governor Ueda has reiterated his commitment to further policy normalisation. However, political pressure from Prime Minister Takaichi's administration to support growth through accommodative financial conditions has raised doubts over how quickly the Bank of Japan can continue tightening policy. We expect this uncertainty to limit any sustained recovery in the yen.
Intervention risks remain elevated. Japanese authorities spent approximately USD 72.5 billion supporting the currency between late April and late May, although the impact has been fully unwound as USD/JPY returned above 160. While intervention could trigger sharp corrections, we continue to see such moves as temporary unless accompanied by a more material shift in the interest rate outlook.
Technically, the pair has shown signs of short term exhaustion after slipping from an intraday high near 161.94, while the daily RSI around 71 points to overbought conditions. Nevertheless, price remains comfortably above the 20 day SMA at 161, the 50 day SMA at 159 and the 200 day SMA at 158, suggesting the broader uptrend remains intact. A break above 162 could open the door towards fresh highs, while a failure to hold 161.50 could encourage a pullback towards the 20 day SMA.
GBP / USD
GBP/USD remains under pressure near 1.3200, trading decisively below the 200 day SMA and 50 day SMA around 1.34 and beneath the 20 day SMA at 1.33, confirming that the broader trend remains firmly bearish. The daily RSI near 37 suggests downside momentum remains intact, although the pair is approaching increasingly oversold territory.
Sterling continues to face a challenging domestic backdrop. Political uncertainty following Prime Minister Starmer's resignation has created a leadership vacuum and delayed important fiscal decisions, while the Bank of England's 7 to 2 vote to keep rates at 3.75% highlights the difficult trade off between elevated inflation and a weakening economy.
At the same time, the Federal Reserve's comparatively restrictive stance continues to support the dollar. US inflation remains elevated at 4.1%, consumer spending remains resilient and markets continue to favour dollar assets, maintaining a clear yield advantage over sterling.
Geopolitical developments also remain an important consideration. Disruptions around the Strait of Hormuz continue to support safe haven demand for the dollar and risk pushing UK energy costs higher, further complicating the Bank of England's policy outlook.
From a technical perspective, support at 1.3150 remains critical. A sustained break below this area could expose the November 2025 low near 1.3014, while any recovery is likely to encounter significant resistance around the 1.3300 area. We continue to see the balance of risks tilted to the downside while dollar strength and domestic political uncertainty remain the dominant themes.
