In my daily analysis of the Forex world, the GBP/JPY pair has caught my attention.
All things being equal, this is a pair that is highly sensitive to risk appetite, and therefore you need to pay close attention to the market in general, as the ¥185 level is very important from a support standpoint.
Ultimately, the market had formed a massive hammer during the trading session on Wednesday, only to turn around and show signs of strength during the Thursday session.
Is this a floor?
The question at this point in time will be whether or not there is going to be a bit of a floor in the market in this general vicinity, but there are a lot of questions asked of the markets as to whether or not we are going to see people be willing to jump in and take advantage of any type of “risk on behavior” that could come into the psyche.
Ultimately, this is a market that I think continues to see a lot of noise and it, which is typical of “The Dragon”, which is obviously one of the premier carry trade markets. If we can go higher, the market could send the British pound to the ¥190 level, perhaps even the 200-Day EMA indicator. On the other hand, if we were to turn around and break down below the bottom of the hammer from the Wednesday session, the market could really start to fall at that point in time, perhaps initially reaching the ¥180 level. Anything below there could send this market plunging much lower and it would probably have a lot to do with the risk out there falling apart, that could send a lot of panic into the market, which will be supercharged buy this market.
I think this is a situation where we continue to see a lot of instability, and therefore you need to be cautious with your position size, but it certainly looks like we are at least trying to turn around and go higher.
For now, the pair is in a consolidation phase, waiting for clearer direction from economic data or market catalysts.
Euro Faces Pressure Amid ECB Decision
The Euro (EUR) faces renewed pressure following the European Central Bank’s (ECB) decision to maintain its Main Refinancing Rate at 3.65%, as widely expected. However, the French Final CPI released earlier showed a slight miss, reinforcing concerns over inflation dynamics.
Meanwhile, industrial production data, due later today, is expected to decline by -0.6%, further weighing on economic sentiment.
Traders will also focus on the ECOFIN and Eurogroup meetings for policy insights. The outlook for the Euro remains uncertain, with any surprises in the upcoming data or statements likely to impact the currency’s short-term trajectory.
EUR/USD Technical Forecast
The EUR/USD is trading at $1.10775, up 0.11%, but facing resistance near $1.10910, a crucial pivot point. If the pair breaks above this level, we could see more bullish momentum toward the next resistance at $1.11201 and beyond.
Gold price extends Thursday’s bullish breakout ahead of US sentiment data on Friday.
The US Dollar keeps the red with Treasury bond yields on renewed bets of outsized Fed rate cut bets.
Gold price achieves a symmetrical triangle target at $2,560, with more upside likely as the RSI stays bullish.
Gold price is sitting at the highest level on record near $2,570, with buyers contemplating the next move amid sustained weakness in the US Dollar (USD) and the US Treasury bond yields. Traders now look forward to the US Michigan preliminary Consumer Sentiment data for fresh directives.
Gold price capitalizes on increased bets jumbo Fed rate cut
Gold price extended the early bounce on Thursday, as the tide turned in favor of buyers following the release of the US Producers Price Index (PPI) and Jobless Claims data, which reinforced bets of an outsized interest rate cut by the US Federal Reserve (Fed) interest rate cut next week.
The PPI increased 0.2% MoM in August, the US Bureau of Labor Statistics (BLS) said Thursday, beating the expected 0.1% increase. Excluding food and energy, PPI rose 0.3%, slightly hotter than the 0.2% consensus estimate. Annually, headline PPI rose 1.7%. Excluding food, energy and trade, the annual rate was 3.3%.
Meanwhile, the Initial Jobless Claims came in at 230,000 for the week ended Sept. 7, up 2,000 from the previous period while aligning with the forecast. Dismal US data combined with the Wall Street Journal (WSJ) article on the Fed’s rate cut dilemma brought back bets for a jumbo cut at the September meeting.
The US Dollar snapped its recovery mode and fell steeply on dovish Fed expectations, tracking the sell-off in the US Treasury bond yields.
The USD also bore the brunt of the resurgent demand for the Euro after the European Central Bank (ECB) on Thursday cut rates but President Christine Lagarde poured cold water on the expectations for another cut next month. The Hawkish cut by the ECB sent EUR/USD higher at the expense of the Greenback.
These factors added to the Gold price rebound, driving the bright metal to a fresh lifetime high of $2,560 on Thursday.
In Friday’s trading so far, Gold price witnessed a fresh leg higher and renewed record highs at $2,568, as Asian traders hit their desks and reacted to the overnight optimism surrounding the renewed dovish bets surrounding the Fed announcements next week.
However, buyers are catching their breath at the moment, as they turn slightly cautious heading into the weekend. Markets could resort to repositioning ahead of next week’s Fed policy meeting, fuelling a corrective decline in Gold price. Also, the end-of-the-week flows could play a pivotal role in the Gold price action alongside the release of the US Consumer Sentiment and Inflation Expectations data.
Gold price technical analysis: Daily chart
As observed on the daily chart, Gold price finally yielded a breakout after closing Thursday above the upper boundary of the three-week-old trading range, pegged at the previous record high of $2,532.
Meanwhile, the 21-day Simple Moving Average (SMA), now at $2,513, continued to offer strong support to Gold buyers.
With the range breakout in play, Gold price finally achieved the one-and-a-half-month-old symmetrical triangle target, measured at $2,560.
Despite the relentless rise, the 14-day Relative Strength Index (RSI) still holds in the bullish territory, with room for more upside until it prods the overbought boundary. The RSI indicator currently trades near 66.50.
If Gold price extends its bullish momentum, the next upside hurdle is seen at the $2,600 level, above which the $2,650 psychological level will be tested.
Should a correction ensue, the initial support is seen at the previous record high of $2,532, below which the 21-day SMA at $2,513 will be put to the test.
A sustained break below the latter is needed to challenge the key $2,500 threshold.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
USD/JPY trends will likely hinge on the Michigan numbers. Upward trends in the Michigan data could temper bets on Q4 2024 Fed rate cuts, possibly pushing the USD/JPY toward 143. However, investors should also consider Bank of Japan commentary and support for Q4 rate hikes.
Investors should remain alert. US consumer sentiment and central bank chatter will likely influence the BoJ and the Fed’s rate paths. Monitor real-time data, central bank insights, and expert commentary to adjust your trading strategies accordingly. Stay updated with our latest news and analysis to manage USD/JPY volatility.
USD/JPY Price Action
Daily Chart
The USD/JPY hovered below the 50-day and 200-day EMAs, confirming bearish price trends.
A USD/JPY breakout from the 142.500 level could indicate a move toward the 143.495 resistance level. Furthermore, a break above the 143.495 resistance level may give the bulls a run at 145 and the 145.891 resistance level.
Bank of Japan commentary and the Michigan Consumer Sentiment numbers require consideration.
Conversely, a break below the 141.032 support level and the September 11 low of 140.706 could indicate a fall through 140.
The 14-day RSI at 31.52 indicates a USD/JPY break below the 141.032 support level before entering oversold territory.
The US dollar has stabilized a bit in the early hours on Thursday against the Japanese yen as we continue to hang around the 142 yen level. This is an area that’s been important multiple times, so it’s not a huge surprise to see that it has come back into the psyche of the market. The question now is whether or not the hammer that we formed on Wednesday leads to gains on Thursday, but so far it has been slightly positive.
We get the PPI number, so that of course will have its own influence, but ultimately the market seemingly is okay with the idea of inflation still being a little bit sticky, so we’ll have to wait and see. But the 18th features the Federal Reserve interest rate decision, which should be a 25 basis point cut. And at this point, I think it’s pretty obvious that has been priced into the market in spades, as it were.
The question now is what will the Bank of Japan do just two days later? I think they are somewhat limited in their ability to hike rates, so the interest rate differential should continue to favor the US dollar, and I do think that sooner or later that will attract inflows.
If we can break above the 145 yen level above, then we could really start to take off, but right now it looks like we’re doing the thing that we need to do to get things turned around initially, and that’s just simply stop falling. If we were to break down below the 141 yen level, it would be an extraordinarily negative turn of events, perhaps opening up a trap door, as if it were in this pair, allowing it to drop much farther.
For a look at all of today’s economic events, check out our economic calendar.
Today’s advance completed a 38.2% Fibonacci retracement at 2.37, with the next price zone target zone from 2.47 to 2.54. The higher price level is the standard target for a rising ABCD pattern (purple). Included within the price range is the 50% retracement at 2.52. The double bottom pattern indicates a potential target from the breakout at 2.72.
That target is derived by calculating the measuring objective of the pattern. Two other targets are nearby creating a price range from 2.65 to 2.72. A 127.2% extended target for the rising ABCD pattern points to 2.65, and the 61.8% Fibonacci retracement is at 2.67. Moreover, a bullish reversal of the prior decline is further confirmed today as the 2.30 level was a swing high that was part of the downtrend price structure.
Reclaims 200-Day MA
Given the decisive breakout above the 200-Day MA today, and a likely strong close, the 200-Day line is key support during pullbacks. It is now 2.25. Of course, a test of support at the 2.30 breakout level (also a weekly high) is the first area to watch for support on weakness.
Top Trendline May Eventually Be Tested
Since natural gas has triggered a double bottom breakout and it is back above each of the moving average, there is the potential that it eventually retests resistance around the top downtrend line. That line is at the top of a large symmetrical triangle pattern. An internal symmetrical triangle is indicated by the internal uptrend line connecting the recent swing low (A). Once support is tested on one side of the pattern there is the possibility to eventually reach the other side. Currently, the 78.6% retracement at 2.89 can be used as a rough proxy for the top trendline.
For a look at all of today’s economic events, check out our economic calendar.
The GBP/USD exchange rate recorded an increase in mid-week trading, with some analysts attributing the weakness of the US dollar to the strong performance of US presidential candidate Kamala Harris.
However, its gains that reached the resistance level of 1.3111 evaporated quickly with the US dollar’s gains against other major currencies following the announcement of US inflation figures through the Consumer Price Index.
As a result, the GBP/USD pair plummeted to the psychological support level of 1.3000 and is currently stabilizing around the 1.3045 level.
Commenting on the performance of the forex market, Francesco Pisol, a forex market analyst at ING N.V., said: “The weakness of the dollar (and bitcoin) across the board, the outperformance of Asian emerging market currencies, and the weakness of US equity futures are consistent with polls suggesting that Harris outperformed Trump in the first presidential debate.”
Registered voters who watched Tuesday’s presidential debate between Trump and Harris “overwhelmingly” agreed that Kamala Harris outperformed Donald Trump, according to a CNN poll of debate watchers conducted by SSRS. The vice president also exceeded the expectations of debate watchers for her performance and Joe Biden’s performance on the stage against the former president earlier this year, according to the poll. According to analysts, “The US dollar has weakened by about 0.3% after the US presidential debate,” and “Based on the reaction of financial markets, Vice President Harris is the winner of the presidential debate.”
Overall, the PredictIt betting market shows that US Vice President Harris now has a 10-point lead over President Trump compared to nearly equal odds before the debate. Regarding the debate, the position among forex analysts is that a Trump presidency would, on the whole, be supportive of US dollar exchange rates. Harris’ strong performance is pushing back against this outcome and the dollar.
Meanwhile, financial markets appear to have given Harris a point victory. In the forex market, a Trump win is linked to the strength of the US dollar, which is trading on the weak side across the board.
The GBP/USD exchange rate was under pressure in September, with the strong rally seen in late August tapering off. Analysts say that September is a seasonally strong month for the US dollar, but it could weaken later in the year amid a number of interest rate cuts by the Federal Reserve.
However, one area of uncertainty is the outcome of the presidential election, meaning the debate was closely watched by markets.
According to Forex trading, the conversion of the British pound to the US dollar fell to 1.3000 on Tuesday before recovering to 1.3111 on Wednesday, although the release of disappointing UK GDP had a negative impact.
What happened to the US inflation figures?
The rise in US inflation after the pandemic slowed further last month as annual price increases hit a three-year low, paving the way for the Federal Reserve to cut US interest rates and likely shape the economic debate in the final weeks of the presidential race. A Wednesday report from the Labor Department showed that US consumer prices rose 2.5% in August compared to a year ago, down from 2.9% in July. This was the fifth consecutive annual decline and the smallest since February 2021. From July to August, prices rose by just 0.2%.
Excluding volatile food and energy costs, so-called core prices rose 3.2% in August compared to a year ago, the same as in July. On a monthly basis, core prices rose 0.3%, a slight rebound from July’s 0.2% increase. Economists are closely watching core prices, which typically provide a better reading of future inflation trends.
For months, the slowdown in inflation has provided gradual relief to American consumers, who have been hit by rising prices that began three years ago, especially for food, gas, rent, and other necessities. Historically, Inflation peaked in mid-2022 at 9.1%, the highest rate in four decades. American wages have been rising steadily over the past three years. Even total incomes have outpaced inflation for nearly 18 months, helping more families cope with higher prices. On Tuesday, the Bureau of Statistics reported that the median US family income, adjusted for inflation, rose 4% last year to more than $80,000, which is essentially in line with the 2019 peak.
Wednesday’s inflation figures came on the heels of a Tuesday night presidential debate in which former US President Donald Trump attacked Vice President Kamala Harris over the rise in prices that began a few months after the Biden-Harris administration took office, when global supply chains were disrupted and caused a severe shortage of parts and Labor.
Technical forecasts for the GBP/USD pair today:
The formation of the downward channel for the GBP/USD is still clear and strong, and breaking below 1.3000 could be an easy target for bears. Also, after which the next important support will be 1.2880, which is the beginning of the technical indicators moving towards strong oversold levels. Conversely, based on the daily chart performance, a return to the 1.3200 resistance will be important to predict the strength of the upward trend again. Technically, we still prefer selling GBP/USD from any upward level. Today, GBP/USD will be affected by the announcement of the rest of the US inflation figures, the Producer Price Index, as well as the weekly US unemployment claims.
Christine Lagarde, President of the European Central Bank (ECB), explains the ECB’s decision to lower the benchmark interest rate by 25 basis points at the September policy meeting and responds to questions from the press.
“Expecting services inflation to decline in 2025.”
This section below was published at 12:15 GMT to cover the European Central Bank’s policy statement and the immediate market reaction.
The European Central Bank (ECB) announced on Thursday that it lowered the interest rate on the marginal lending facility to 3.9% from 4.5% and the deposit facility, also known as the benchmark interest rate, by 25 basis points (bps) to 3.5% as expected. The ECB also cut the interest rate on the main refinancing operations by 60 bps to 3.65%.
In its monetary policy statement, the ECB noted that it is now appropriate to take another step in moderating the degree of monetary policy restriction, based on the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.
ECB policy statement key takeaways
“Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner.”
“Inflation is expected to rise again in the latter part of this year.”
“Will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim.”
“Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.”
“Domestic inflation remains high as wages are still rising at an elevated pace.”
“In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.”
“Labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation.”
“Governing Council is not pre-committing to a particular rate path.”
“Financing conditions remain restrictive, and economic activity is still subdued.”
ECB projections
“Staff project that the economy will grow by 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026.”
“Inflation forecast: 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, as in the June projections.”
“New core inflation forecast: 2.3% in 2025 and 2.0% in 2026.”
Market reaction to ECB policy decisions
The ECB’s policy announcements failed to trigger a noticeable reaction in the Euro. At the time of press, EUR/USD was trading virtually unchanged on the day at 1.1015.
Euro PRICE This week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the weakest against the Australian Dollar.
USD
EUR
GBP
JPY
CAD
AUD
NZD
CHF
USD
0.57%
0.64%
0.00%
0.16%
-0.18%
0.61%
1.03%
EUR
-0.57%
0.01%
-0.53%
-0.41%
-0.80%
0.04%
0.44%
GBP
-0.64%
-0.01%
-1.44%
-0.42%
-0.81%
0.01%
0.42%
JPY
0.00%
0.53%
1.44%
0.14%
-0.17%
0.59%
1.21%
CAD
-0.16%
0.41%
0.42%
-0.14%
-0.29%
0.44%
1.04%
AUD
0.18%
0.80%
0.81%
0.17%
0.29%
0.84%
1.23%
NZD
-0.61%
-0.04%
-0.01%
-0.59%
-0.44%
-0.84%
0.41%
CHF
-1.03%
-0.44%
-0.42%
-1.21%
-1.04%
-1.23%
-0.41%
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).
This section below was published as a preview of the European Central Bank’s (ECB) policy decisions at 07:00 GMT.
The European Central Bank is expected to cut key rates by 25 bps at the September policy meeting.
ECB President Christine Lagarde’s presser and updated economic forecasts will be closely scrutinized for fresh policy cues.
The ECB policy announcements are set to inject volatility around the EUR/USD pair.
The European Central Bank (ECB) interest rate decision will be announced alongside the publication of the staff’s updated economic projections following the September monetary policy meeting due on Thursday at 12:15 GMT.
ECB President Christine Lagarde’s press conference will follow, beginning at 12:45 GMT, where she will deliver the prepared statement on monetary policy and respond to media questions. The ECB announcements are likely to rock the Euro (EUR) against the US Dollar (USD).
What to expect from the European Central Bank interest rate decision?
After standing pat on interest rates in July, the ECB is widely expected to reduce benchmark interest rate, the deposit facility, by 25 basis points (bps) to 3.50%. As for the marginal lending facility and the main refinancing operations rate, the consensus has changed to a 60-basis-points cut to 3.9% and 3.65%, respectively. This comes after the ECB’s review of the operational framework, which stated that the spread between the deposit rate and the main refinancing operations rate would be reduced to 15 basis points as from September 18.
In June’s post-policy meeting press conference, ECB President Christine Lagarde said that “we are determined not to have a predetermined rate path. September decision is wide open.” “September projections, plus other data, will be taken into account,” Lagarde added.
The accounts of the July ECB meeting showed that September “was widely seen as a good time to re-evaluate” the level of monetary policy restriction.
Since the July meeting, the Eurozone inflation cooled off significantly, returning closer to the central bank’s 2.0% target.
Eurostat’s preliminary data showed on August 30 that the Harmonised Index Of Consumer Prices (HICP) across the currency bloc rose 2.2% over the year in August, marking the lowest annual inflation rate since July 2021. Meanwhile, the Euro area negotiated wages increased at an annual pace of 3.55% in Q2 2024 after rising 4.74% in the first quarter of this year.
The ECB accounts combined with a sharp decline in the pace of wage growth, cooling inflation and weakening Euro area business activity indicate that a rate reduction is a given on Thursday.
Therefore, the ECB’s communication on the path forward and its outlook on inflation and growth will hold the key for the market’s pricing of the future rate cuts and the Euro’s (EUR) next directional move.
Previewing the ECB meeting, TD Securities analysts said: “A 25bps cut is a near-certainty. What matters will be guidance beyond September, where there’s strong pressure on both sides. Wage growth and services inflation remain strong (emboldening the hawks), while growth indicators are flagging softer (emboldening the doves).” “Lagarde is unlikely to rule out an October cut, but quarterly cuts are likely more consistent with the new projections,” the analysts added.
How could the ECB meeting impact EUR/USD?
Heading into the ECB showdown, the Euro is clinging to recovery gains, with EUR/USD reversing from monthly lows of 1.1020. The pair’s fate hinges on the ECB’s outlook on interest rates beyond September.
ECB President Christine Lagarde is likely to stick to the bank’s data-dependent stance and refrain from giving a certain response on the next rate cut move. Unless the policy statement, or Lagarde, hints at more rate reduction coming in the final quarter of this year, the EUR/USD recovery is seen gathering further traction.
Conversely, the Euro could come under renewed selling pressure if the staff projections show downward revisions to both the inflation and economic growth outlook. Meanwhile, Lagarde’s increased confidence in the disinflation progress could also revive Euro sellers. These factors could double down on the dovish expectations, fuelling the resumption of the recent EUR/USD downtrend.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:
“EUR/USD maintains its bearish streak, especially after the Relative Strength Index (RSI) indicator returned below the 50 level on the daily chart. If sellers flex their muscles, the immediate support of the 50-day SMA at 1.0964 will be tested. Further south, the pair could aim for the strong demand area near 1.0870, where the 100-day SMA and the 200-day SMA coincide.”
“On the upside, the pair needs to find acceptance above the 21-day Simple Moving Average (SMA) at 1.1082 on a daily closing basis to sustain the recovery toward the September 6 high of 1.1155, above which the 1.1200 psychological level will challenge bearish commitments.”
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
The European Central Bank trimmed interest rates, repeated it will remain data-dependant.
The United States Producer Price Index rose by more than anticipated MoM in August.
XAU/USD eased just modestly from a fresh all-time high, maintains its bullish strength.
Spot Gold surged to a fresh all-time high of $2,555.11 on Thursday, following the European Central Bank (ECB) monetary policy announcement and some relevant macroeconomic figures from the United States (US). Still, the news had a limited impact across the FX board, as they lacked a surprise factor. Nevertheless, XAU/USD soared, finding additional support on the poor performance of US indexes after Wall Street’s opening.
On the one hand, the ECB decided to reduce the deposit facility rate by 25 basis points (bps) to 3.5%, as widely anticipated. However, the interest rate on the main refinancing operations was cut by 60 bps to 3.65%, while the interest rate on the marginal lending facility was also trimmed by 60 bps to 3.9% from 4.5% previously. The decision could be seen as dovish, but it fell short of having a negative impact on the Euro.
On the other hand, the US reported that the August Producer Price Index (PPI)h rose by 1.7% from a year earlier, below the 1.8% expected and the previous 2.1%. On a monthly basis, the PPI was up by 0.2%, slightly above the 0.1% anticipated. Additionally, Initial Jobless Claims for the week ended September 6 met expectations by printing at 230K. The figures were supportive of a Federal Reserve (Fed) interest rate cut next week but not enough to revive hopes for an aggressive 50 bps reduction. The US Dollar turned lower afterwards.
In the meantime, Asian and European equities edged higher, compliments to a firm recovery in the tech sector. US indexes, however, were unable to follow the positive lead, with the Dow Jones Industrial Average and the S&P500 posting modest intraday losses.
XAU/USD short-term technical outlook
XAU/USD trades a handful of $ below the aforementioned record high, retaining its bullish stance. The daily chart shows it met buyers around a bullish 20 Simple Moving Average (SMA) for the sixth consecutive day, while the 100 and 200 SMAs keep heading north, far below the shorter one. Technical indicators, in the meantime, picked up bullish momentum with plenty of room to extend gains.
The 4-hour chart for the XAU/USD pair shows the risk skews to the upside. The 20 SMA is picking up above a flat 100 SMA over $30 below the current level, while the 200 SMA grinds north well below the other two. Finally, technical indicators maintain their sharp upward slopes, with the Relative Strength Index (RSI) indicator approaching overbought readings. Nevertheless, there are no signs of bullish exhaustion, with buyers likely adding on pullbacks and aiming for higher highs.
The EUR/JPY pair is one I am watching very closely.
This is mainly due to the fact that the market is approaching a psychologically significant figure in the form of ¥155, and that we have seen quite a bit of noise in that area previously.
The question now will be whether or not the market can form some type of “double bottom”, and of course whether or not the so-called “death cross” comes into the picture and forces people to acknowledge that we might go much lower.
Risk Appetite
The carry trade has been absolutely slaughtered over the last several weeks, and quite frankly I’m a bit surprised at just how far out of control it’s gotten. We’ve seen the Japanese yen strengthen quite drastically, but it is worth noting that there is a Bank of Japan interest rate decision on September 20 that could greatly influence where we go next. After all, the Japanese can talk a tough game, but sooner or later higher interest rates will destroy the Japanese economy. Japan is one of the most indebted economies in the world, so this is like a massive game of chicken that they are playing, and somebody’s about to get ran over.
Having said that, you need risk appetite to come back into the market for this to be a viable long position. The interest rate differential does favor the euro, but I would also point out that we are approaching an area that there could be a bit of a “trapdoor” waiting, meaning that if we break down from here, it could get really ugly, and really quick. The Japanese yen has gained about 12% against the euro from the peak, which of course is a huge move to say the least.
I think the one thing you can count on is a lot of volatility here, and at this point in time it’s a bit like” catching a falling knife.” While I don’t necessarily want to buy the market, I don’t necessarily want to short it either. However, I am willing to have a go with a small position to the upside if we can break above the ¥157.50 level.
