The euro begins the week after the ECB raised its interest rate by 25 basis points. The regulator raised the deposit rate to 2.50% and indicated that inflation will remain above target for longer than expected. This supports the euro, but the effect of the decision has already been partially priced in by the market, while rising energy costs simultaneously increase risks for the eurozone economy.
The American side of the pair received a fresher impulse following August’s inflation data. Rising consumer prices strengthened expectations of an FOMC rate hike at the September 15–16 meeting, and US Treasury yields have remained near multi-year highs. This gives the dollar an advantage over the regulator’s decision, especially given investors’ cautious risk appetite.
As a result, support from the ECB for the euro currently does not outweigh the reassessment of the Fed’s trajectory. Expensive energy further complicates growth prospects for the eurozone, while the expectation of a US rate hike remains a relevant driver for the current session. Given this backdrop, the priority remains a decline in EUR/USD.
Trading idea: SELL 1.1595, SL 1.1630, TP 1.1515
GBPUSD
The pound maintains support after strong UK economic data: UK GDP grew by 0.4% month-on-month in July, and the services sector also added 0.4%. This reduces fears of a sharp economic slowdown and limits pressure on the British currency, so a GBP/USD downside scenario requires a stronger external factor.
Such a factor remains the overpricing of Fed policy following recent US inflation. The market prices in an approximately 86% probability of a rate hike this week, while the Bank of England is expected to mainly keep rates at 3.75% on Thursday. The divergence in short-term expectations and high US bond yields support demand for the dollar.
Rising oil prices complicate the picture for the UK: they can support inflation but simultaneously increase costs for households and businesses. Strong GDP curbs the potential for a pound decline, yet it does not create an advantage over the current dollar momentum. Within the base scenario, the idea of selling GBP/USD remains more resilient.
Trading idea: SELL 1.3520, SL 1.3560, TP 1.3425
USDJPY
The yen enters the new week after one of its strongest stretches in recent months. The market is actively pricing in a rate hike by the Bank of Japan at Friday’s meeting, and speculative positions on the yen have turned purely positive for the first time since February. Expectations of further policy tightening and the potential return of Japanese capital are supporting the national currency.
At the same time, the dollar receives counter-support from US rates. The market estimates the probability of an FOMC rate hike this week at approximately 86%, the yield on two-year Treasury bonds remains above 4.6%, and ten-year yields are around 5%. The interest rate differential remains significant, so after the yen’s strong appreciation, USD/JPY retains recovery potential.
The key risk to this scenario is a stronger signal from the Bank of Japan regarding further rate hikes. However, the expected 25 basis point move is already largely priced in by the market, and the current news focus is more on the rate trajectory than on new actions by authorities in the foreign exchange market. With sustained demand for the dollar, the base case allows for USD/JPY growth.
