• GBP/USD consolidates previous week’s impressive gains below 1.3200.
• Fed Chairman Powell’s remarks on Friday triggered a USD selloff.
• The pair remains technically overbought ahead of US Durable Goods Orders data.

GBP/USD gained 1% on Friday and rose more than 2% for the week, fuelled by the heavy selling pressure surrounding the US Dollar (USD). After touching its highest level since March 2020 at 1.3230, the pair seems to have entered a consolidation phase below 1.3200 at the beginning of the week.

Following Thursday’s recovery attempt, the USD Index, which tracks the USD’s valuation against a basket of six major currencies, turned south on Friday.

In his keynote speech at the annual Jackson Hole Economic Symposium on Friday, Federal Reserve (Fed) Chairman Jerome Powell noted that the labor market is no longer overheated and said that they will do everything they can to support a strong labor market, while making further progress toward price stability. He also acknowledged that the time has come for them to adjust the monetary policy.

The US economic docket will feature Durable Goods Orders data for July later in the day. The market expectation is for a 4% increase, following the 6.7% contraction recorded in June. Although this data by itself is unlikely to influence the Fed’s policy outlook, it could trigger a short-lasting reaction. A negative print could weigh on the USD, while a noticeable rebound, with a reading of 5% or stronger, could support the USD and cause GBP/USD to correct lower.

GBP/USD Technical Analysis

GBP/USD started to edge lower after rising above the upper limit of the ascending channel, suggesting that the pair is staging a technical correction. The Relative Strength Index (RSI) indicator on the 4-hour chart stays well above 70, hinting that the pair has more room on the downside to complete its correction.

1.3170 (mid-point of the ascending channel) aligns as first support before 1.3120 (lower limit of the ascending channel) and 1.3100 (psychological level, static level). On the upside, 1.3200 (static level, psychological level) could be seen as immediate resistance before 1.3230 (upper limit of the ascending channel) and 1.3270 (static level from March 2022).

• High interest rates might lead to more cracks in the US labor market.

• US inflation will likely reach the 2% target sustainably.

• The BoJ will keep tightening monetary policy.

The USD/JPY outlook paints a pessimistic picture as the dollar tumbles after Powell’s strongly dovish tone. Meanwhile, the yen strengthened after BoJ governor Kazuo Ueda maintained that the central bank would hike rates if inflation rose as expected.

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The policy outlooks in Japan and the US have diverged yet again. However, this time, it is in favor of the yen. FOMC meeting minutes last week revealed that policymakers were ready to start lowering interest rates. However, Powell’s tone on Friday was more dovish and his guidance clearer.

According to him, inflation will likely reach the 2% target sustainably. Meanwhile, high interest rates might lead to more cracks in the labor market. Therefore, it is time for the Fed to adjust its policy. A pivot from high interest rates to rate cuts will likely mean a weaker dollar. At the same time, there will be less motivation to hold high-yielding US assets when the Fed starts cutting rates. Therefore, this will lead to an unwinding of the popular carry trade, boosting the yen. 

At the same time, the Bank of Japan is pivoting to a more hawkish outlook. Initially, there were fears that the market turmoil witnessed after the first rate hike would put a pause in policy adjustment. However, BoJ Governor Kazuo Ueda dismissed these fears.

Ueda said as long as inflation is rising as expected, the central bank will keep tightening monetary policy. Consequently, the yen will strengthen and the interest rate gap between Japan and the US will shrink.

USD/JPY key events today

It will be a slow start to the week with no key events. Therefore, investors will keep digesting Friday’s policy remarks.

USD/JPY technical outlook: Bears target 142.56 amid surge in momentum

On the technical side, the USD/JPY price has finally fallen, detaching from the 30-SMA and the 0.382 Fib level. Therefore, the bearish bias has strengthened with the price far below the SMA and the RSI nearly oversold. 

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Bears are now heading for the 142.56 support level. A break below this level will solidify the bearish bias and lead to lower prices. On the other hand, if the level holds, the price might pause or reverse.

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• The Euro has rallied rather significantly during the trading session on Friday as the US dollar has crumbled due to Jerome Powell finally admitting at the Jackson Hole Symposium that the Federal Reserve is not only going to cut, but we may be entering a cycle of cuts.
• With that, the market finally got to what it wanted as it had been bullying the Federal Reserve to get very loose, and now we’re back to the liquidity trap.
• That’ll be great for inflation for real people because this is exactly what causes inflation, but it does keep the asset prices moving and at the end of the day that’s really what the Federal Reserve is there for.

We Could Go Higher At This Point

So, with that being said, I do think we’ve got a situation where the EUR/USD could go higher, perhaps to the 1.1250 level where I would anticipate seeing quite a bit of resistance. If we can break above there, then it’s likely that we will go much higher. On the other hand, we could see that as massive resistance and the catalyst might be people being concerned about the economy itself rolling over.

It’ll be interesting to see how this plays out, but clearly this is a market that is anti-US dollar. We are a little bit stretched at this point. So, pullbacks do make a certain amount of sense, but it’s really not until we break back below the 1.10 level. that I would start to have the conversation of shorting the market. So, I don’t think I’m really looking at right now.

This market will continue to be very choppy and noisy. And of course, it’s probably worth noting that the European Central Bank is likely to be loose with its monetary policy also. So, I don’t think it’s like going to be a straight shot higher.

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• I can see that we initially tried to reach the 200-Day EMA and break above it.
• However, we have failed from there and it looks like we are going to continue to be very noisy overall. If that’s going to be the case, then I think you’ve got a situation where traders are going to continue to look at the 200-Day EMA as important, as it is a large indicator that a lot of people will be paying close attention to.

If we can break above the 200-Day EMA on a daily close, then I think you’ve got a real shot at this pair going much higher. If and when that happens, then you’ve got a real shot at the market going toward the ¥195 level above, which is sitting right around the 50-Day EMA. Anything above that level opens up a much bigger move, and it probably means that we are now back into the “carry trade.”

All things being equal, this is a pair that I really like to hold, but I also recognize that we would see a lot of technical damage to it over the last several weeks, as the Bank of Japan decided to finally tighten monetary policy somewhat. With this being the case, I think you’ve got a scenario where the market is likely to be a bit lackluster, and you have seen over the last week or so that we have just been shopping back and forth. With that being the case, it’s very likely that you have a market that is trying to build up enough momentum to go somewhere, but we don’t necessarily know where that direction is.

Possible Scenarios

Keep in mind that we need a little bit of a “risk on rally” to send this market higher, as traders tend to buy into this pair when they feel fairly confident. There are a lot of moving headlines out there that could cause major issues, so therefore you need to be very cautious about what you do next. The market breaking above the 200-Day EMA could very well send a rush of “FOMO trading” into the currency pair, but I also recognize that there is a lot of nonsense out there that could cause a bit of a headache.

If we break down below the ¥186 level, then I think we probably plunge toward the ¥182 level, where we had bounce from previously. If we break down below that level, then I think this pair unwinds quite drastically.

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