USD/JPY Slumps Towards 136.0 as Global Yields Dump, EUR/USD Chops Near 1.02

Key Points

• USD/JPY slumped nearly 1.0% on Friday amid falling global yields as weak US/EZ PMI data bolstered recession bets.
• EUR/USD chopped either side of 1.02 and GBP/USD either side of 1.20, with both capped by their 21DMAs.
• USD/CAD bounced at its 50DMA and rose back above 1.29 on falling oil prices.

USD/JPY Slumps as Yields Dump, EUR/USD Unchanged Just Above 1.0200

A hefty slump in global bond yields in response to weak US and Eurozone July PMI data which pointed to both regions being in/on the verge of recession provided tailwinds to the Japanese yen via favorable shifts in rate differentials. USD/JPY was last trading lower by nearly 1.0% on Friday near the 136.0 level, having seen a modest rebound from earlier intra-day lows in the 135.50s. Friday’s drop saw the pair dip below its 21-Day Moving Average for the first time since late May.

In response to Friday’s soft US and Eurozone PMI figures, markets pulled back expectations for Fed and ECB tightening, a reflection of bets that weak growth later this year will help head off multi-decade high inflation and encourage both central banks to take a slower approach. As a result, EUR/USD saw a choppy session, but ultimately looks set to end the day broadly unchanged just above 1.0200.

For the most part, the pair traded within familiar mid-1.01s to mid-1.02s ranges. But technicians said its failure to get above weekly highs in the upper-1.02s and the 21DMA at 1.0260 is notable. Even though US GDP data for Q2 next week is likely to show that the US economy contracted for a second successive quarter, confirming a recession, the Fed is expected to deliver a second successive 75 bps rate hike on Wednesday to tackle souring inflation.

Indeed, the Fed’s expected rate hike timeline leaves what markets are expecting to the ECB to deliver in the coming quarters in the dust. This divergence in central bank expectations is keeping traders reluctant to continue chasing EUR/USD higher. And while the US economy might already be in recession, so to might the Eurozone economy, another reason not to buy the euro against the buck.

GBP/USD Still Stuck Below 1.2000

GBP/USD faces similar woes to its euro counterpart. Cable continued to trade within familiar levels on Friday either side of the 1.2000 mark and, like EUR/USD, looked reluctant to break higher. Like EUR/USD, the 21DMA (at 1.2016) is still capping the price action, as has been the case now for a few days.

PMI survey data for July was also released out of the UK on Friday and, while a tad better than expected and still above the 50.0 level that separates expansion from contraction, fell to its lowest level in 17 months. Meanwhile, Retail Sales data for June, while also not as bad as expected, still showed consumer spending declining on a MoM basis, as UK consumers continue to struggle with the ongoing cost of living crisis.

While the divergence between Fed and BoE policy isn’t quite as pronounced as the divergence between the Fed and ECB, it still acts as a deterrent to chase GBP/USD higher. Meanwhile, against the backdrop of a synchronized weakening of global growth, it makes sense for traders not to chase dollar weakness.

Elsewhere in the G10, AUD/USD and NZD/USD were both choppy in the respective 0.69-0.6975 and 0.62 to 0.63 areas, with an on-the-day drop in US equity and commodity prices preventing a push above their 50DMAs at 0.6970 and 0.6315. Both still look set to post decent weekly gains, however, with both benefitting from a rise (on the week) in global stocks and build-up of RBA/RBNZ hawkish bets.

Similarly, USD/CAD rejected an earlier attempt to break below support in the form of the 50DMA at 1.2850 and moved back above 1.2900. The loonie was last down nearly 0.5% on the day versus the buck, weighed amid falling crude oil prices.