EUR/USD gains limited while USD/CAD makes a reversal, and USD/JPY falls

US dollar price analysis and talking points

• EUR/USD edges towards key resistance
• USD/CAD makes a key reversal
• USD/JPY fails at 200-day simple moving average (SMA)

Option markets point to muted session

Today’s session is likely to see major forex pairs trading in relatively narrow ranges with option implied volatility suggesting tame price action. Alongside this, sizeable vanilla option expiries may also curb volatility given that they can act as a draw in times subdued price action.

These expiries over the next two days are particularly evident in EUR/USD, GBP/USD and USD/JPY (大口）.

EUR/USD edges towards key resistance

The euro has made a notable turnaround following the Federal Reserve's (Fed) rate decision. Initially, the market had interpreted the decision as a hawkish cut, resulting in USD upside. However, this had quickly reversed after Chairman Jerome Powell stated that a rate hike would only take place if inflation rose significantly, thus setting a high bar for future rate hikes.

That said, EUR/USD is testing the 200-day SMA at $1.1171 and is trading at last weeks highs. Although, with risks still tilting to the downside in the eurozone and with trade war headlines dampening market sentiment, gains in the pair are somewhat limited above $1.12.

USD/CAD makes a key reversal

The Canadian dollar saw a notable drop following the dovish Bank of Canada (BoC) rate decision, in which the central bank removed its rhetoric that current rates remain appropriate, while also highlighting that Canada’s resilience is likely to be increasingly tested amid the global uncertainty.

Consequently, money markets made a sharp repricing of future easing from the BoC in 2020, prompting a key reversal in USD/CAD. As the pair made a close above $1.3145, risks are tilted towards further gains with the $1.32 handle in focus, particularly if risk sentiment deteriorates.

USD/JPY fails at 200-day SMA

Post the FOMC decision, USD/JPY traded above its 200-day SMA for the first time since the beginning of May. However, the pair had failed to make a close above this and subsequently proceeded to trend lower. Reports this morning that China do not see a long-term trade deal with President Trump has benefitted safe-havens, with USD/JPY back towards the ¥108.20-108.30 support.

Given the large option expiry at ¥108.00 further losses may be curbed in the near term, unless there is a further deterioration in risk appetite. As a reminder, the next key event is tomorrow’s Non-Farm Payroll (NFP) and ISM releases with the Fed outlook now increasingly data dependent.