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Joint US-Japan intervention has distorted some of the dollar’s strongest relationships this year. That leaves EUR/USD testing major resistance under highly unusual circumstances.

  • Joint intervention distorts dollar’s strongest macro relationships
  • EUR/USD tests January downtrend amid intervention threat
  • Euro area data surprises strongest since early 2023
  • July payrolls to decide if dollar weakness persists

EUR/USD is testing long-running downtrend resistance in early Asian trade on Monday, reacting to an artificial, and potentially temporary, slide in the dollar late last week. Rather than the economic calendar or technicals, it’s likely the Japanese yen that determines whether resistance holds or snaps, with the threat of further joint intervention by Japanese and US authorities likely to dominate proceedings.

Yen Intervention Remains the Dominant FX Driver

Markets widely expect Japan to announce on Monday that it coordinated with the US to support the yen last week, marking the first joint intervention by the two nations in decades. But the bigger question is whether authorities have finished.

As outlined in our USD/JPY week-ahead report released over the weekend, prior intervention episodes suggest there’s a strong chance of further action should yen weakness re-emerge. With USD/JPY already rebounding from the earlier session lows, the risk of additional intervention cannot be overlooked on Monday.

That points to further artificial downside in the dollar, driven by factors other than fundamental market forces. Should the intervention episode continue, it would likely provide another tailwind for EUR/USD, increasing the risk the recent rebound extends further.

However, whether that weakness lasts beyond the short term is another matter entirely. A heavy slate of US economic data, including Friday’s non-farm payrolls report, will likely determine whether the move can grow into something more sustainable.

Traditional Dollar Relationships Weaken

Assessing whether dollar weakness can be sustained is more difficult because some of this year’s strongest relationships have weakened sharply over the past week. Over the past month, the US Dollar Index has continued to display a reasonably strong relationship with the Fed funds futures curve, reflecting market expectations for Fed rate hikes between June this year and June next year, along with US 2-year Treasury yields, with 20-day correlation coefficients of 0.62 and 0.65, respectively.

However, over the past five sessions those relationships have deteriorated sharply. The correlation with the Fed funds futures curve has fallen to just 0.29, while the relationship with US 2-year Treasury yields has weakened to only 0.14. Correlations with other drivers, including energy prices, have also deteriorated over the same period.

While month-end flows may explain part of the shift, the intervention episode unfolding in Japan also appears to be distorting the broader market message. What has driven the dollar for much of this year isn’t necessarily what’s driving it right now.

Euro Data Turns a Corner

While intervention may be helping propel EUR/USD higher in the short term, it’s not the only factor at work. Euro area economic data has staged a remarkable turnaround in recent months, with the Citi Economic Surprise Index, which measures whether data is beating or missing economists’ forecasts, rebounding sharply from the lows seen during the early stages of the Iran conflict.

The recovery has been nothing short of V-shaped. Having languished in deeply negative territory in April, the index has surged to its highest level since early 2023, pointing to a growing prevalence of upside surprises across the euro area. Friday’s inflation report only reinforced that trend, with both headline and underlying inflation accelerating, strengthening the case for another ECB rate hike.

By contrast, while the US economy continues to outperform, it is finding it harder to deliver upside surprises relative to elevated market expectations. That suggests EUR/USD’s rebound is not solely a by-product of intervention-driven dollar weakness, with improving relative fundamentals also helping underpin the move.

The Calendar Takes a Back Seat

Speculation surrounding further intervention, along with the associated flows through the Japanese yen, are likely to remain the dominant influence on EUR/USD during Monday’s session. As a result, the economic calendar may struggle to generate sustained moves unless it delivers a surprise.

Of the scheduled releases, US ISM services PMI looks the most likely candidate to spark a fundamentally driven move, although even that may be giving it too much credit in the current environment. The US Treasury’s quarterly refunding announcement will also attract attention, but it’s typically Wednesday’s release detailing the composition of debt issuance that has the greater market impact.

The Senior Loan Officer Opinion Survey rounds out the calendar. While it has influenced markets before, it’s a backward-looking report and, against this unique backdrop, its ability to generate meaningful volatility looks extremely limited.

Trendline Showdown

Looking at EUR/USD on the daily timeframe, the technical stakes today are high with the pair now trading through downtrend resistance that’s been in place since the highs set in late January.

The descending triangle structure that had contained price action last week was shattered following the Fed decision last Wednesday, delivering a breakout that saw EUR/USD push not only through former resistance at 1.1480, but also the 50-day simple moving average, extending the move into a test of the long-running downtrend. That becomes the key level to watch today, along with the 100-day simple moving average sitting marginally above at 1.1569.

A clean break and close above the trendline would strengthen the view that a trend change may be taking place, opening the door towards the 23.6% Fibonacci retracement of the January 2025 to January 2026 bull move at 1.1633, which also coincides with the 200-day simple moving average. Beyond that, 1.1670 is the next level to watch, with a break above opening the door towards 1.1800 and 1.1850.

On the downside, should the downtrend continue to cap gains, a reversal back towards the confluence of the 50-day simple moving average and former resistance at 1.1480 may be on the cards. A break beneath that would open the door for a retest of the support zone comprising the 38.2% Fibonacci retracement of the January 2025 to January 2026 bull move, horizontal support at 1.1364, and the June 24 swing low at 1.1325.

The oscillators continue to favour further upside. RSI (14) continues to push above the neutral 50 level without entering overbought territory at 64, while MACD has confirmed the bullish signal with a crossover above the signal line and a move back into positive territory. However, that message comes with the caveat that artificial factors have played a significant role in the latest bout of euro strength.

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