EUR / USD
EUR/USD rallied around 0.4% to 1.1463 after softer than expected US inflation prompted a sharp reassessment of Federal Reserve policy expectations. June CPI fell 0.4% month on month, the first monthly decline since April 2020, while producer prices also surprised to the downside. As a result, markets sharply reduced expectations for a July Fed rate increase, weakening the dollar and allowing EUR/USD to recover towards recent highs.
The technical picture has improved in the near term. The daily RSI has recovered to around 53 after spending much of the previous month below 40, while the pair has moved back above both the 20 day SMA and the 30 day VWAP around 1.1400. However, we continue to see significant resistance around the 50 day SMA at 1.1500 and the 200 day SMA at 1.1600, which are likely to limit the scope for a sustained recovery unless the macro backdrop shifts more decisively in favour of the euro.
The underlying fundamental picture remains less supportive. Recent eurozone data, including weaker industrial production, continues to highlight subdued economic momentum, while expectations for additional ECB tightening remain limited. At the same time, renewed tensions in the Middle East have kept Brent crude close to USD 85 per barrel, posing a greater challenge for the eurozone as a major energy importer and maintaining some underlying support for the dollar through safe haven demand.
Looking ahead, we expect markets to focus on whether EUR/USD can establish a foothold above 1.1500. A sustained break would improve the technical outlook, while failure to overcome this resistance could see the pair drift back towards support around 1.1400.
USD / JPY
USD/JPY continues to consolidate near multi decade highs around 162.16, with the wide interest rate differential between the United States and Japan remaining the dominant driver. Although softer US inflation has reduced expectations for an immediate Federal Reserve rate increase, US policy rates remain well above those in Japan, preserving the attractiveness of dollar assets and supporting carry trade demand.
The latest inflation data has nevertheless moderated expectations for further Fed tightening, reducing upward pressure on US Treasury yields and limiting additional gains in the pair. Meanwhile, the Bank of Japan is widely expected to leave policy unchanged at its upcoming meeting, and recent domestic data have offered mixed signals, providing little support for a stronger yen.
Technically, USD/JPY remains constructive despite signs that momentum is easing. The pair continues to trade above the 20 day SMA at 161.99 and comfortably above the 200 day SMA at 158.08, while the daily RSI has eased to around 58, suggesting the strong rally has begun to lose some momentum without signalling a broader reversal.
Intervention risk also remains elevated as the yen trades near thirty nine year lows. We expect Japanese authorities to continue monitoring currency moves closely, although any intervention is likely to have only a temporary impact unless accompanied by a more meaningful narrowing in the US Japan yield differential. The key levels to watch remain resistance around 162.80 and support near the 30 day VWAP at 161.64.
GBP / USD
GBP/USD climbed around 1.1% to 1.3534 after weaker than expected US inflation prompted a broad sell off in the dollar and significantly reduced expectations of a near term Federal Reserve rate increase. The decline in US Treasury yields has narrowed the interest rate differential between the United States and the United Kingdom, while expectations for a further Bank of England rate increase continue to provide support for sterling.
The technical outlook has strengthened considerably. The pair has broken above both the 50 day and 200 day SMAs around 1.3400, while the daily RSI has climbed to around 67, reflecting strong upward momentum, although approaching overbought territory. We see the move above 1.3500 as an important improvement in the medium term technical picture, provided the pair can hold above this level.
Domestic fundamentals have also become more supportive, with easing political uncertainty and improving sentiment ahead of the forthcoming UK EU summit helping to underpin sterling.
However, risks remain balanced. Brent crude holding near USD 85 per barrel continues to pose inflation risks that could revive expectations of tighter US monetary policy if energy prices remain elevated. We expect support around 1.3400 to be closely watched, while a sustained move above 1.3500 could open the way towards the January high near 1.3850 if dollar weakness persists.
