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EUR/USD and GBP/USD slump while USD/JPY moves higher

Risk aversion has driven losses for the euro and sterling against the dollar, as fears about economic growth dominate.

EUR/USD slumps to two-year low

The recent declines in EUR/USD have been driven by concerns about a broader slowdown in the eurozone economy, but also by the widening gap between US and European Central Bank (ECB) monetary policy.

While the Federal Reserve (Fed) is already raising rates, and discussing how to increase the pace of tightening, the ECB has so far left policy unchanged. As a result the dollar remains in the ascendant over currencies like the euro.

With the two-year low being tested in early trading, the pair now looks to push on towards the $1.045 level, last seen at the end of 2016 and the beginning of 2017. Already there are calls for a move to parity for the pair, and this is something that must be watched once the $1.044 level is breached.

GBP/USD falls sharply

Two days of heavy losses have resulted in the pair moving back to levels not seen since July 2020. Concerns about economic growth have motivated a flight to safety that has now taken in GBP/USD in dramatic fashion.

Additional declines now bring $1.248 and then $1.225 into view, as the pair remains under pressure in the short term.

Next week’s central bank decisions from the Bank of England (BoE) and the Fed promise to provide further volatility. While unlikely, given their caution around the UK economy, a more hawkish outlook from the BoE might allow sterling to stabilise in the short term.

USD/JPY recovers after short-lived losses

USD/JPY remains at an elevated level, recovering after some short-lived weakness over the past week. The Fed’s hawkish posture continues to contrast sharply with the situation in Japan, where the Bank of Japan (BoJ) remains committed to loose monetary policy.

So far the price shows no desire to push much lower, although a drop below ¥127.00 would reinforce the short-term bearish view. The price remains overextended, after its huge run higher since the beginning of March, but for the moment it is holding steady, while the 50-day Simple Moving Average (SMA) continues to play catch-up.

Upward progress has been lacking over the last week, with the price apparently unable to break above the April high and push on towards ¥130.00.

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