EUR / USD
Source: Massive (polygon.io)
EUR/USD has recovered to around 1.1629, supported by renewed dollar weakness after Fed Governor Waller’s dovish comments reduced expectations of a September rate increase from close to 70% to around 50%. The shift has pushed the Dollar Index towards 99, while stronger eurozone producer prices have provided additional support for the euro by reinforcing expectations of further ECB tightening. However, eurozone growth remains subdued and Brent crude above USD 95 per barrel continues to pose a stagflationary risk for the energy dependent bloc.
Technically, EUR/USD is consolidating around a significant cluster of indicators, with the 20 day and 200 day SMAs and the 30 day VWAP concentrated near 1.1600. The daily RSI around 57 indicates improving momentum without approaching overbought territory. We see the ability to remain above 1.1600 as constructive, although the pair still needs to clear the 1.1640 to 1.1700 resistance region to establish a more convincing bullish breakout.
Attention now turns to US nonfarm payrolls, where expectations are unusually dispersed following a series of softer labour market indicators. A weaker report could further reduce September Fed tightening expectations and open the way towards 1.1700 and potentially 1.1780 to 1.1800. Conversely, stronger employment data could revive the recent hawkish repricing and push EUR/USD back below 1.1600 towards 1.1520. With Fed officials also placing considerable emphasis on next week’s CPI release, we expect US rate expectations to remain the dominant source of volatility beyond today's payrolls report.
USD / JPY
Source: Massive (polygon.io)
USD/JPY has extended its decline to around 156.33, leaving the pair more than 4% below its late July highs as expectations of BoJ tightening strengthen while the outlook for another Fed rate increase becomes less certain. Markets are now pricing a September BoJ increase increasingly firmly, while dovish commentary from Fed Governor Waller has reduced expectations of a September Fed move towards 50%. This potential convergence in policy expectations has provided a powerful fundamental tailwind for the yen.
The technical structure has deteriorated significantly, with USD/JPY trading below the 20 day, 50 day and 200 day SMAs as well as the 30 day VWAP. The daily RSI has fallen towards 33, however, indicating that bearish momentum is becoming increasingly stretched and raising the possibility of a corrective recovery. We see the 155 to 156 area as the critical near term support zone, while the former moving average cluster around 159 now represents increasingly significant resistance.
A decisive break below 155 would reinforce the bearish structure and could expose the 153 to 152 region. Conversely, deeply oversold conditions leave scope for a rebound, although the pair would need to recover towards 159 before the broader technical picture begins to improve. Friday’s payrolls and next week’s US CPI release should determine whether the narrowing US Japan policy differential can extend, with further weakness in US data likely to maintain downward pressure on USD/JPY.
GBP / USD
Source: Massive (polygon.io)
GBP/USD has recovered to around 1.3542 as softer Fed expectations provide some relief from the dollar strength that dominated earlier in the week. The pair has moved back above the 50 day SMA and 30 day VWAP around 1.3500, although it remains below the 20 day SMA near 1.3600. The daily RSI around 52 reflects broadly neutral momentum, suggesting the latest recovery has improved the technical picture without yet establishing a convincing upward trend.
The relative policy outlook remains finely balanced. Fed Governor Waller’s more dovish comments have reduced expectations of a September rate increase, while persistent UK inflation pressures continue to constrain the BoE’s ability to adopt a more accommodative stance. At the same time, Brent crude above USD 95 per barrel presents an important risk for the UK economy, potentially sustaining inflation while weighing on household demand and broader growth.
We see 1.3500 as the key support required to preserve the recovery, while a break above 1.3563 would shift attention towards the 20 day SMA around 1.3600. Conversely, renewed weakness below 1.3500 could expose 1.3415 to 1.3400. Today's nonfarm payrolls report is the immediate catalyst, although next week’s US CPI data may ultimately prove more important for the September Fed decision. For now, we expect GBP/USD to remain highly sensitive to shifts in US rate expectations, with a softer payrolls print offering the clearest route towards extending the recovery.
