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EUR/USD Reverses Its Technical Trend

Is this the end of the U.S. dollar’s relative strength❓ On Monday, the EUR/USD exchange rate broke through an important technical barrier marked by the 200-day exponential moving average, also briefly breaching the 1.16 zone and reaching levels not seen for almost two months. Maintaining this momentum and closing the intraday candle above this level could seal a reversal of the long-term trend towards a more bullish one. The sell-off in the US currency is continuing despite ongoing tensions in the Middle East. Although the lack of progress in US-Iran negotiations is keeping Brent crude prices around $89 a barrel, the dollar – traditionally regarded as a safe haven and supported by the US’s position as a net exporter of crude – is failing to gain ground. Weak data are causing a reassessment of expectations regarding the Fed

The current weakness of the US currency is primarily due to disappointing macroeconomic data. This has prompted the markets to significantly revise their expectations regarding the Federal Reserve’s (Fed) future moves. Market pricing of the interest rate path has cooled dramatically compared with the situation four weeks ago. According to the latest data, investors are no longer pricing in a rate rise at either the September or October meetings. The probability of a rate rise at the final meeting in December has fallen to around 85 per cent. Source: XTB The key factor tempering the Fed’s ambitions is the state of the economy. The US labour market has entered a ‘low fire-low hire’ phase, as indicated by weaker NFP figures, even though the unemployment rate and weekly jobless claims continue to hover around multi-year lows. A marked slowdown is evident in consumption – Friday’s figures revealed the first fall in retail sales in nine months (-0.6 per cent m/m), which concerned analysts all the more as the negative result persisted even after excluding sales of cars and fuel. Meanwhile, last week’s CPI (in line with expectations) and PPI (lower than forecast) inflation figures allayed market fears of a resurgence of sharp price pressures. Markets currently assess the likelihood of so-called second-round inflationary effects as low, which buys the Federal Open Market Committee (FOMC) time to assess the impact of the energy shock on the economy. Politics casts a shadow over the central bank’s independence The dollar’s depreciation is also accompanied by growing concerns about the Federal Reserve’s own independence. Speculation has intensified following reports of renewed attempts by the former president to dismiss one of the FOMC’s decision-makers, Lisa Cook. Political pressure is causing the bond yield curve to steepen. Yields on short-term bonds are falling in line with dovish expectations, whilst yields on long-term, 30-year bonds remain close to 25-year highs. In the coming days, market attention will focus on Friday’s release of the US PMI figures. However, the key event of the month for the dollar and future interest rate expectations remains the annual symposium in Jackson Hole, scheduled for 27–29 August, during which markets will be looking for the Fed to make a clear statement on the weakening economic outlook.

On Monday, EURUSD broke through an important technical barrier marked by the 200-day exponential moving average, also breaching the 1.16 zone (although some of the upward momentum was subsequently reversed) and reaching levels not seen for almost two months. The RSI remains elevated on a 14-day average, but has yet to breach the textbook 70-point level, which is sometimes regarded by parts of the market as a potential overbought zone. Source: xStation

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GBP gathers strength to near 1.3550 as Fed hike bets fade, UK jobs data loom

  • GBP/USD drifts higher to near 1.3550 in Tuesday’s early Asian session. 
  • Traders expect just a 35% chance of a rate increase at the Fed’s September meeting. 
  • The UK jobs data will take center stage later on Tuesday. 

The GBP/USD pair gains momentum to around 1.3550 during the early Asian trading hours on Tuesday. The US Dollar (USD) softens against the British Pound (GBP) as cooler US inflation data have prompted traders to reduce bets on a US Federal Reserve (Fed) rate hike. The UK employment report will be in the spotlight later on Tuesday.

The weak US Retail Sales, along with softer-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) inflation data last week, have tempered expectations that the US central bank will raise rates at its September 15-16 policy meeting. Traders are now pricing in just a 35% probability of a September hike, alongside a 69% odds of a rate increase by December, according to the CME FedWatch tool. 

Bank of England (BoE) Chief Economist Huw Pill said last week ‌that stronger-than-expected UK economic growth readings reinforced the case for higher borrowing costs to bring inflation back to target.

Financial markets have priced in at least one interest rate increase by the Bank of England (BoE) this year, according to data compiled by LSEG. 

Traders will closely watch the UK jobs and inflation data later this week, which could offer some hints about the BoE interest rate path. The UK Unemployment Rate is projected to fall to 4.8% in June from 4.9% in May. Better-than-expected outcomes could lift the GBP against the USD in the near term. 

Uk data barrage keeps Pound traders on edge

Strategists at Scotiabank highlight a cautious tone in the market, noting that “markets are perhaps a little cautious ahead of this week’s barrage of UK data—wages, jobs, CPI, Retail Sales etc..” They suggest that the upcoming releases are encouraging investors to tread carefully around the Pound, even as it trades near recent highs against the USD.

Chart Analysis GBP/USD

Technical Analysis: The positive outlook of GBP/USD prevails above the 100-day SMA

In the daily chart, GBP/USD maintains a bullish near-term bias as spot holds above both the 100-day simple moving average (SMA) and the Bollinger middle band. The pair is advancing toward the Bollinger upper band, which caps the topside for now, while the Relative Strength Index (14) around 64 stays in positive territory but shy of overbought, hinting that bullish momentum is constructive yet not overstretched.

On the downside, initial demand is seen at the Bollinger middle band at 1.3440, followed by the 100-day SMA at 1.3420 as a deeper but still supportive layer, with the Bollinger lower band near 1.3275 marking a more distant structural floor. On the topside, a clear break above the Bollinger upper band at 1.3605 would open the door for further gains, while failure to overcome this barrier could trigger consolidation or a corrective pullback toward the clustered support zone in the mid-1.34s.

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CAD holds near early June high as rising oil prices offset modest USD strength

  • USD/CAD struggles to gain any meaningful traction amid a combination of diverging forces.
  • Monday’s hotter Canadian inflation figures and rising crude oil prices underpin the Loonie.
  • Geopolitical risks and inflation jitters lend support to the safe-haven USD and spot prices.

The USD/CAD pair struggles to build on the overnight bounce from the 200-day Simple Moving Average (SMA) support near the 1.3845 region, or the lowest level since June 3, and is seen consolidating during the Asian session on Tuesday. Spot prices currently trade around the 1.3870 zone, unchanged for the day, amid a combination of diverging forces.

Monday’s hotter Canadian consumer inflation figures and rising crude oil prices continue to underpin the commodity-linked Loonie, which, in turn, acts as a headwind for the USD/CAD pair. Meanwhile, inflation risks stemming from higher oil prices, along with the US-Iran standoff, help revive demand for the safe-haven US Dollar (USD). This holds back traders from placing fresh bearish bets on the currency pair and limits the downside.

Statistics Canada reported that Canada’s headline Consumer Price Index (CPI) increased 0.5% in July and the yearly rate rose to 3%, above the 2.9% market forecast and up from 2.8% in June. Adding to this, the Bank of Canada’s (BoC) core CPI measure rose 2.3% YoY, up from 2.1%, while the monthly reading increased 0.2% following a 0.1% rise previously.  However, the BoC is likely to keep its key policy rate on hold for the rest ‌of this year.

On the geopolitical front, President Donald Trump repeated his idea of declaring the critical Strait of Hormuz as a US territory and threatened to bomb Oman if it gets in the way. Trump added that the US is not seeking an extension of the Memorandum of Understanding (MoU) with Iran, which expired on Monday, keeping the geopolitical risk premium in play. This, along with inflation risks stemming from higher oil prices, supports the USD.

Investors remain worried that volatile energy prices would rekindle price pressures and force the US Federal Reserve (Fed) to adopt a more hawkish stance. Hence, FOMC Minutes, due for release on Wednesday, will be looked upon for more cues about the Fed’s future policy path, which will drive the USD. Apart from this, the incoming geopolitical headlines and oil price dynamics should provide some impetus to the USD/CAD pair.

USD/CAD daily chart

Chart Analysis USD/CAD

Technical Analysis

The USD/CAD pair defends the 200-day SMA at 1.3848, which keeps the broader bias modestly bullish. Although downside attempts are being absorbed near the said support, a clean break beneath would be seen as a key trigger for bearish traders and open the door to a deeper correction. However, holding above it would keep the path of least resistance tilted higher in the near term.

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New Zealand Dollar edges lower below 0.5900 as China’s economy slows in July

  • NZD/USD softens to near 0.5895 in Tuesday’s Asian session. 
  • China’s Retail sales grew 0.6% YoY in July; Industrial production expanded 4.5% YoY during the same period. 
  • Expectations of a US interest rate hike next month eased.  

The NZD/USD pair declines to around 0.5895 during the Asian trading hours on Tuesday. Weaker-than-expected Chinese Retail Sales and Industrial Production data weigh on the China-proxy New Zealand Dollar (NZD) against the US Dollar (USD). 

China’s Retail Sales arrived at a 0.6% growth from a year earlier, according to the National Bureau of Statistics on Monday. This figure came in worse than the estimated 1.5% and slowed from the 1.0% growth in June. Additionally, Industrial Production rose 4.5% YoY in July, versus 5.3%, falling for the first time in three months and missing expectations. 

Statistics Bureau spokesperson Fu Linghui said that geopolitical pressure abroad and high temperatures domestically impacted China’s economy last month. The report indicated China’s economy lost momentum across the board in July, which dragged the Kiwi lower as China is a major trading partner of New Zealand.

However, lower bets for a US Federal Reserve (Fed) rate hike could undermine the Greenback and act as a tailwind for the pair. Markets are now pricing in a September quarter-point hike, flipped to a near-65% chance of a hold, after softer consumer price inflation and weaker retail sales.

Kiwi support tempered as RBNZ seen pausing after July hike

Commerzbank’s Volkmar Baur notes that “in about two weeks, the Reserve Bank of New Zealand will hold its next monetary policy meeting,” and, based on the softer inflation indicators released this morning, “it seems unlikely that it will raise interest rates for a second consecutive time following the July hike.” While the latest data argue for a pause after July’s move, Baur expects the RBNZ to retain a hawkish tone given ongoing Middle East risks, which should offer some near-term support to the Kiwi even as a weak domestic economy weighs on the longer-term outlook.

Chart Analysis NZD/USD

Technical Analysis: NZD/USD

In the daily chart, NZD/USD holds a constructive bullish bias as spot remains above both the 100-day moving average and the Bollinger middle band. The pair is approaching the Bollinger upper band, which caps the immediate topside, while the Relative Strength Index (14) around 61 sits in bullish but not overbought territory, suggesting that buying pressure persists yet may slow as price nears overhead supply.

On the downside, initial support is offered by the Bollinger middle band at 0.5855, reinforced by the 100-day moving average at 0.5830 slightly lower, with the Bollinger lower band near 0.5765 acting as a deeper cushion in case of a broader pullback.

On the topside, a clear break above the Bollinger upper band at 0.5945 would open the door for an extension of the recovery, while failure to overcome this barrier would likely trigger consolidation or a corrective dip toward the aforementioned support cluster.

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United States Dollar Index holds ground on safe-haven demand

  • The US Dollar Index steadies as Trump’s refusal to renew the Iran deal and naval blockades elevate global geopolitical tensions.
  • Weak payrolls and modest inflation data reduce Fed rate hike bets.
  • CME FedWatch shows Fed rate hike expectations falling to 35% for the September meeting, down from 47% last month.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is inching higher after three days of losses and trading around 99.60 during the Asian hours on Tuesday. The DXY receives minor support from safe-haven demand, which could be attributed to the geopolitical tensions between the United States (US) and Iran.

US President Donald Trump announced he has no interest in renewing the expiring agreement with Iran, citing the ongoing naval blockade of Iranian ports as evidence of Washington’s leverage and reiterating his idea of declaring the critical waterway as US territory under total American control. Moreover, Iranian Foreign Ministry spokesman Esmail Baghaei asserted that an agreement remains elusive due to security complexities and the “obstructionist behavior of destructive elements,” demanding that the US first lift its blockade.

The Greenback may face challenges as hawkish sentiment surrounding the Federal Reserve (Fed) policy outlook fades. A recent, unexpected decline in July US Nonfarm Payrolls, combined with last week’s modest consumer price inflation data, has significantly reduced market anticipation of an interest rate increase next month. Consequently, expectations for a Fed rate hike at the upcoming policy meeting have dropped to 35%, down from 47% a month earlier, according to the CME FedWatch Tool.

Strategists at Scotiabank report that the “USD got roughed up a bit last week and Dollar trends continue to soften broadly on Monday,” pushing the DXY “just below the base of the August consolidation range and to the lowest point since early June.” They note that “soft US data reports are dampening Fed tightening expectations” and argue that “the 25bps of tightening still priced in by year-end is too much from our perspective.” At the same time, Scotiabank highlights “clear signs of market angst about US fiscal dynamics,” a concern they say is “reflected in the steepening US yield curve.”

Technical Analysis:

United States Dollar Index Spot trades around 99.60, maintaining a bearish near-term bias as price holds beneath both the nine-period exponential moving average (EMA) at 99.79 and the 50-period EMA at 100.21. The configuration of short- and medium-term EMAs above spot suggests the index remains capped, while the 14-day Relative Strength Index (RSI) at 37.51 stays below the midline, hinting at lingering downside pressure despite a lack of outright oversold readings.

Chart Analysis Dollar Index Spot
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JPY remains near two-week low against US Dollar despite hawkish BoJ bets

  • The Japanese Yen holds onto two-week losses near 159.50 against the US Dollar.
  • The BoJ is highly anticipated to raise interest rates in the September policy meeting.
  • Investors await FOMC minutes, which will be released on Wednesday.

The Japanese Yen (JPY) trades close to its two-week low against the US Dollar (USD) in the Asian trading session on Tuesday at around 159.50. The USD/JPY pair is under pressure even as financial markets are confident about a Bank of Japan (BoJ) interest rate hike in the September meeting.

Yen outlook steadies as MUFG flags elevated BoJ hike odds

Analysts at MUFG highlight that market expectations for further BoJ tightening remain robust, with “the pricing for a 25bp hike at the next meeting in September remains elevated, implying around an 80% probability of a hike.” They argue that this firm rate-hike pricing, set against the backdrop of softer US data, should help limit renewed Yen selling in the near term despite Japan’s weaker-than-expected GDP.

In the latest BoJ Summary of Opinions (SoP), several board members favored further monetary tightening in the near term after leaving interest rates unchanged at 1%. One board member said that the central bank should increase the monetary tightening pace, citing upside inflation risks.

Meanwhile, Japan’s preliminary Q2 Gross Domestic Product (GDP) data has come in weaker-than-expected, an event that could act as headwind for firm BoJ hawkish bets.

Japan growth disappoints as net exports and government spending prop up GDP

Brown Brothers Harriman’s Elias Haddad notes that Japan’s Q2 performance was weaker than expected, with “real GDP rose 0.3% q/q (consensus: 0.5%) vs. 0.5% in Q1” and growth largely reliant on external and public sector support. He points out that the expansion was “driven by net exports (+0.5ppt), government consumption (+0.3ppt), and private inventories (+0.3ppt),” underscoring how net exports and fiscal spending are offsetting softer underlying domestic demand.

On the US Dollar front, the currency is expected to trade sideways as Federal Open Market Committee (FOMC) minutes of the July policy meeting takes the centre stage, which will be released on Wednesday.

In the policy meeting, the Fed left interest rates unchanged in the range of 3.50%-3.75%, as expected and didn’t deliver any forward-guidance on policy rates.

Investors will pay attention to FOMC minutes to get fresh cues regarding inflation and the economic outlook.

USD/JPY Technical Analysis

In the daily chart, USD/JPY trades at 159.51, holding below a dense Fibonacci retracement cluster that keeps the pair capped in the near term. Price sits under the 50.0% retracement at 159.64 and the 61.8% level at 160.67, suggesting topside attempts are vulnerable while these barriers remain intact.

The Relative Strength Index (14) at 44.70 is below the midline, hinting at waning bullish momentum and reinforcing a cautious, mildly bearish bias as the market consolidates after the recent pullback.

On the topside, immediate resistance is located at the 50.0% Fibonacci retracement at 159.64, followed by the 61.8% level at 160.67. Above there, the 78.6% retracement at 162.14 and the cycle high area marked by the 100.0% level at 164.01 define the next barriers. On the downside, initial support emerges at the 38.2% retracement at 158.61 ahead of the 23.6% level at 157.33, with deeper structural support anchored much lower by the extended Fibonacci projection near -46.01, which serves more as a distant reference than a practical downside target.

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AUD/JPY Price Strengthens to near 113.50, near-term outlook remain constructive

  • AUD/JPY gathers strength to near 113.40 in Tuesday’s early European session. 
  • The cross keeps the positive tone above the 100-day SMA, with bullish RSI momentum. 
  • The initial support level is seen at 113.00; the first upside barrier to watch is 113.88. 

The AUD/JPY cross trades in positive territory around 113.40 during the early European trading hours on Tuesday. The Japanese Yen (JPY) weakens against the Australian Dollar (AUD) amid mounting fiscal concerns and persistent inflationary pressures. Traders await the release of the Australian jobs data, which is due later on Thursday. 

Prime Minister Sanae Takaichi’s plan to cut the consumption tax on food to 1% for two years has raised market concerns, as the government has yet to identify an alternative revenue source and the measure is viewed as an ineffective way to combat inflation. Additionally, markets are also concerned about elevated energy costs, which are weighing on Japan’s oil-dependent economy and the Japanese Yen. 

Nonetheless, expectations have been mounting for the Bank of Japan (BoJ) to raise rates at its next policy meeting in September. Reuters in a report Friday said the Japanese central bank is considering a rate hike as soon as September. Overnight index swaps are pricing in an about 80% probability of a move by that month.

Yen narrative shifts as BoJ hike odds surge while Fed expectations fade

DBS strategist Philip Wee highlights a sharp repricing in relative policy expectations, noting that “market odds of a September Bank of Japan rate hike have surged to 81% from 21%, while expectations for a Fed hike have plummeted to 32% from 72%.” He argues that JPY bears may be underestimating the implications of this swing in market-implied probabilities, especially against the backdrop of a more supportive stance on higher interest rates from Prime Minister Sanae Takaichi, who is under growing domestic pressure to stabilize the Yen.

Chart Analysis AUD/JPY

Technical Analysis: AUD/JPY maintains a constructive bias in the near term

In the daily chart, AUD/JPY retains a bullish near-term bias as price holds above both the 100-day simple moving average (SMA) and the Bollinger Bands middle line, suggesting a firm underlying demand zone. The Relative Strength Index (14) at 57.55 remains comfortably above neutral, hinting at constructive momentum without yet reaching overbought conditions.

On the downside, immediate support is seen at the 100-day SMA at 113.00, followed by the Bollinger middle band near 112.65. The next contention level is located at the lower band around 110.00. 

On the topside, the immediate resistance level emerges at the July 16 high of 113.88, en route to the July 27 high of 114.67. The next hurdle to watch is the Bollinger upper band near 115.25, where a daily close above this ceiling would open the door for a continuation of the uptrend.

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Trade of The Day – USD/CAD

Facts

  • USDCAD pulled back after Canada’s July CPI inflation data.
  • Gasoline prices in Canada rose by 25.7% year over year, compared with 20.5% in June.
  • CPI inflation increased by 3.0% versus a 2.9% forecast and 2.8% previously, while the monthly rate came in at 0.5% versus a 0.4% consensus.
  • The unemployment rate stood at 6.4%, while employment increased by 75.1 thousand.
  • Prices of travel tours rose by 15.2% year over year, while airfares increased by 12% year over year.
  • The preliminary GDP estimate points to annualized growth of 3.4% in Q2.

Recommendation Short position on USDCAD at the market price

  • Take Profit: 1.3582
  • Stop Loss: 1.3938

Opinion Against the backdrop of recent macroeconomic data, the balance of risks for USDCAD may gradually be shifting to the downside. U.S. CPI inflation came in line with expectations and the latest PPI report showed weaker price pressures, while Canada’s July CPI accelerated to 3.0% year over year and exceeded the consensus. Importantly, core inflation measures also came in above forecasts, which may limit the Bank of Canada’s room to pursue a more accommodative monetary policy. The pressure was not limited to fuel prices. CPI Core Trim rose to 1.9%, Core Median to 2.0%, and inflation excluding food and energy to 1.9% year over year. All three measures came in above consensus. At the same time, U.S. data did not provide a comparable inflationary impulse: CPI was in line with expectations, while PPI weakened.

This divergence may support the CAD if it begins to translate into relatively more hawkish expectations for the Bank of Canada compared with the Fed. The Canadian economy is also not currently sending unambiguous signals that would require rapid monetary easing: employment rose by 75.1 thousand, while the preliminary estimate points to annualized GDP growth of 3.4% in Q2. The market is pricing in the first possible BoC rate hike only in January, so a further series of stronger inflation readings could leave room for a shift in interest-rate expectations and additional support for the CAD. From a USDCAD perspective, this creates an argument for a possible further pullback, as the relative inflation path is beginning to look more favorable for the Canadian dollar. The key point is not the 3.0% CPI reading itself, as part of the increase came from fuel, transport and World Cup-related factors, but rather the fact that several core measures also exceeded expectations.

The Canadian dollar remains sensitive to oil prices, global risk sentiment and the condition of the U.S. economy, while a single CPI report does not determine a change in BoC policy. However, if subsequent data confirm more persistent inflation in Canada alongside further easing of price pressures in the U.S., relative expectations for the BoC and the Fed could increasingly favor the CAD, raising the risk of a further decline in USDCAD. Canada’s annual consumer inflation rate accelerated to 3.0% in July, exceeding market expectations of 2.9%. The renewed increase, following the slowdown to 2.8% in June, was driven primarily by sharp increases in fuel prices as well as higher travel and transport costs, supported by stronger activity around the football World Cup. Although inflation remains elevated, this does not automatically imply a return to hawkish expectations for rate hikes, so we recommend taking a short position in the pair with a relatively tight stop-loss level defined by the 200-period exponential moving average, EMA200, shown by the red line, and recent price reactions around 1.393, with a target level at 1.3582.

USDCAD chart (D1 interval)

Source: xStation5 Supporting graphics

Source: XTB Research