• BoJ’s Ueda reaffirmed his commitment to hike rates if inflation rises sustainably.

• Economists believe Japan’s central bank will hike rates one more time before the year ends.

• Powell’s speech might contain clues about the size and pace of future moves.

The USD/JPY outlook is mildly bearish as the yen strengthens after hawkish comments from the Bank of Japan Governor Kazuo Ueda. Meanwhile, the US dollar was under pressure ahead of Powell’s speech at the Jackson Hole symposium. 

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On Friday, BoJ’s Ueda had to explain before parliament why the central bank surprised markets with a rate hike at the last meeting. He reaffirmed his commitment to hike rates if inflation rises sustainably. Economists believe Japan’s central bank will hike rates one more time before the year ends. The last rate hike caused turmoil in global markets as investors unwound the popular carry trade. 

Initially, investors borrowed the low yielding yen to buy high yielding US assets. However, when the Bank of Japan started tightening its monetary policy, investors panicked. However, Ueda’s tone showed policymakers were ready to keep increasing borrowing costs.

Meanwhile, in the US, Fed policymakers on Thursday supported the outlook for a rate cut next month. They dropped the previous cautious tone, indicating confidence that inflation will reach the 2% target. At the same time, markets are implying a 73.5% chance the central bank will cut rates by 25 bps. 

The focus is now on the Jackson Hole symposium. Powell’s speech might contain clues about the size and pace of future moves. Investors will likely react more to clues about policy after September.

USD/JPY key events 

• Fed Chair Powell Speaks
• Jackson Hole Symposium

USD/JPY technical outlook: Price consolidates around 0.382 Fib

On the technical side, the USD/JPY price has risen to retest the 30-SMA resistance. However, the bias remains bearish since it has stayed below the SMA and the RSI is slightly under 50. Nevertheless, there is little enthusiasm to make large swings. 

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Neither bears nor bulls are ready to push the price too far away from the SMA. This is a sign of indecision. At the same time, the price has remained near the 0.382 Fib level. If bears regain momentum, USD/JPY will bounce lower to the 142.56 support level. Otherwise, it might break above the SMA to retest the 149.01 resistance.

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• EUR/USD edges higher as the US Dollar drops as traders shift their focus to Fed Powell’s speech at the Jackson Hole Symposium.
• Investors look for fresh interest-rate guidance for September and the remainder of the year.
• The ECB is widely anticipated to cut interest rates again in September.

EUR/USD recovers mildly to near 1.1120 in Friday’s New York session after correcting from a fresh year-to-date high of 1.1174 on Thursday. The major currency pair edges higher as the US Dollar (USD) resumes its recent weakness after a decent recovery move a day earlier, amid caution ahead of Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to near 101.30 after recovering from a more-than-seven-month low of 101.00 to nearly 101.60 on Thursday. The US Dollar bounced back strongly after the flash US S&P Global PMI report for August showed that the Composite PMI came in better than estimated at 54.1. Overall, the report showed that business activity was boosted by a robust expansion in the services sector, while the manufacturing part of the economy contracted at a faster-than-expected pace.

In his speech at the JH Symposium – scheduled at 14:00 GMT – Jerome Powell is expected to provide cues on interest rates and the United States (US) economic outlook. Market participants are keen to know the size of interest rate cuts in the September meeting, given that a “vast majority” of officials said that “if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting,” according to Federal Open Market Committee (FOMC) minutes of July 30-31 policy meeting.

Investors also consider the chances of the US economy to achieve a “soft landing”, knowing that price pressures are on track to return to the desired rate of 2%. Fears of a potential US recession escalated after the Nonfarm Payrolls (NFP) report for July indicated a sharp slowdown in the labor demand and an increase in the Unemployment Rate to 4.3%, the highest level seen since November 2021.

Analysts don’t expect Jerome Powell to provide a preset interest rate path. However, he may call rate cuts in September as appropriate, given that risks have now expanded to both aspects of dual mandate (inflation and employment).

Daily digest market movers: EUR/USD edges higher despite optimism over ECB rate cuts 

• EUR/USD edges higher from the round-level support of 1.1100 as investors underpin the Euro (EUR) against the US Dollar. However, the Euro is underperforming against other major peers as markets increasingly expect the European Central Bank (ECB) to reduce interest rates again in September.
• Rising expectations of ECB rate cuts in September are supported by the uncertainty over the Eurozone’s economic outlook and cooling wage pressures. 
• The flash Eurozone HCOB PMI report for August, released on Thursday, rose to 51.2, higher than expected, indicating that overall business activity expanded at a faster pace. However, this rosy picture signaled by the PMI surveys was linked to strong demand from the Olympic Games in Paris and it is likely to be short-lived rather than structural. Therefore, the uncertainty over the economic performance in the coming months remains intact.
• PMI data also signaled that business activity in the Eurozone’s largest economy, Germany, declined sharply mainly due to a significant drop in foreign demand, with no recovery in sight, signaling the need for fresh stimulus to boost demand.
• Meanwhile, a sharp decline in the Q2 Negotiated Wage Rates propelled hopes of more ECB rate cuts this year. The data, which was released in Thursday’s European trading hours, showed that Negotiated Wage Rates grew at a slower pace of 3.55% from 4.74% in the first quarter this year, easing fears of inflation remaining persistent.
• Economists at ING said in a note on Thursday, “The European Central Bank has remained uncomfortable with cutting interest rates while wage growth is elevated.” Lower wage growth in Q2 should help ease policymakers’ concerns in this matter.

Technical Analysis: EUR/USD rises toward 1.1200

EUR/USD holds above the round-level support of 1.1100, with investors focusing on Fed Powell’s speech at the JH Symposium. The outlook of the shared currency pair has remained upbeat after a breakout of a channel formation on a daily time frame. All short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong uptrend.

The 14-day Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, touching overbought levels but still suggesting a strong upside momentum.

In case of a decisive break above the December 28, 2023, high at 1.1140, Euro bulls could aim to recapture round-level resistance of 1.1200. On the downside, the round-level figure of 1.1100 acts as a major support zone.

• GBP/JPY may find immediate resistance around the 21-day EMA at 191.63.
• The daily chart analysis indicates a potential for a weakening bullish bias.
• A breach below the ascending channel could signal the emergence of a bearish bias.

GBP/JPY retraces its recent gains from the previous two days, trading around 190.90 during the Asian session on Friday. The daily chart analysis indicates that the pair is attempting to break below the lower boundary of the ascending channel, suggesting a potential for a weakening bullish bias. Additionally, the 14-day Relative Strength Index (RSI) is positioned below the 50 level, indicating that bearish momentum is in play.

The MACD (Moving Average Convergence Divergence) line is above the signal line, suggesting that there is some upward momentum in the short term. However, the MACD line is still below the zero line, signaling the overall trend is still bearish. This could indicate a potential recovery or a temporary upward movement within a broader downtrend.

In terms of resistance, the 21-day Exponential Moving Average (EMA) at 191.63 level appears as the immediate barrier. A break above the 21-day EMA could reinforce the bullish sentiment and support the pair GBP/JPY cross to explore the region around the upper boundary of the ascending channel at the 195.50 level.

On the downside, a successful breach below the ascending channel may cause the emergence of the bearish bias and put downward pressure on the GBP/JPY cross to navigate the area around the seven-month low at 180.09 level, which was recorded on August 5. Further support appears at throwback support at 178.50 level.

GBP/JPY: Daily Chart

• The British pound has rallied initially during the trading session on Thursday to break above the 1.31 level, but it looks like we are giving back some of the gains.
• That’s interesting considering that the 1.31 level is a major resistance region on the weekly chart, so it does make a certain amount of sense.
• You also have to keep in mind that the last several days have been basically straight up in the air, so sooner or later people are going to want to take a bit of profit.

The question now is whether or not we will get a significant pullback. If we do, there are a couple of levels that I’ll be watching for potential support. The first one, of course, is the 1.30 level, as it is a large, round, psychologically significant figure, but after that we have the 1.2850 level that’s been important multiple times in the past. Furthermore, we have the 50-day EMA hanging around the 1.2850 level, so it all ties together quite nicely.

Is the USD Selling Done?

This could be the end of the US dollar selling. We’ll just have to wait and see. I think a lot of that comes down to what Jerome Powell says on Friday. He has a big speech, and if he sounds overly hawkish or maybe not so sure about being dovish, that’s going to cause chaos in the market yet again. That will almost certainly send the US dollar higher in value. And that, of course, would be felt over here. On the other hand, if he sounds somewhat dovish or we get some other risk on move.

A break above the 1.3150 level probably kicks off the next leg higher. Regardless, we are a little overdone, so I think a pullback is probably the most likely outcome here, as the market had gotten way too far ahead of itself as it seems to be prone to do these days. All things being equal, keep in mind, it’s a very volatile situation out there, so you do not want to have a huge position on whatever you choose to do.

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• USD/JP meets with a fresh supply on Friday and is pressured by a combination of factors.
• The Fed-BoJ policy divergence, along with a softer risk tone, underpins the safe-haven JPY.
• Traders look to Fed Chair Jerome Powell’s speech for rate-cut cues and a fresh impetus.

The USD/JPY pair comes under some renewed selling pressure on Friday and reverses a part of the overnight modest gains, led by a goodish US Dollar (USD) recovery from the YTD low. Spot prices, however, manage to hold above the weekly low touched on Wednesday and remain confined in a multi-day-old range as traders opt to wait on the sidelines ahead of a crucial speech by Federal Reserve (Fed) Chair Jerome Powell later today. Powell’s remarks at the Jackson Hole Symposium will be scrutinized for cues about the US central bank’s rate-cut path, which will influence the US Dollar (USD) price dynamics and determine the next leg of a directional move for the currency pair. In the meantime, expectations for an imminent start of the Fed’s policy easing cycle continue to act as a headwind for the buck and seem to weigh on the currency pair. 

According to the CME Group’s Fedwatch Tool, investors are convinced that the US central bank will lower borrowing costs by 25 basis points (bps) and are also pricing in the possibility of a larger-than-normal, 50 bps rate cut move. The bets were lifted by the annual benchmark review of employment data released on Wednesday, which showed that US employers added 818,000 fewer jobs than reported during the year through March. Furthermore, the minutes of the July 30-31 FOMC meeting revealed that an increasing number of policymakers backed the case for a rate cut next month amid progress in bringing down inflation. Adding to this, the US Department of Labor (DoL) reported on Thursday that Initial Jobless Claims rose to a seasonally adjusted 232K in the week ending August 17, up from the 228K previous, pointing to a cooling labor market. 

Meanwhile, the S&P Global flash composite US PMI showed that the business activity in the US private sector continued to expand at a healthy pace and a fall in selling price inflation to a level close to the pre-pandemic average. Additional details of the report indicated that the gauge for the services sector unexpectedly ticked higher, though was largely offset by the fact that business activity in the US manufacturing sector shrank at the fastest pace this year. This, in turn, revived fears that the world’s largest economy is at risk of a slowdown and tempers investors’ appetite for riskier assets, driving some haven flows towards the Japanese Yen (JPY) and contributing to the USD/JPY pair’s downtick. The JPY is further underpinned by Bank of Japan Governor Kazuo Ueda’s hawkish remarks, signaling to raise rates if inflation stays on course to hit the 2% target.

Speaking during his first appearance in Japan’s parliament, Ueda said that the recent market volatility – led by concerns of a US recession – would not derail the BoJ’s long-term rate hike plan. This marks a big divergence in comparison to the Fed’s dovish outlook, which, in turn, suggests that the path of least resistance for the USD/JPY pair is to the downside. 

Technical Outlook

From a technical perspective, any further weakness is likely to find some support near the 145.00 psychological mark ahead of the weekly low, around the 144.45 region touched on Wednesday. Some follow-through selling will reaffirm the negative outlook and prompt aggressive selling. Given that oscillators on the daily chart are holding deep in negative territory and still away from being in the oversold zone, the USD/JPY pair might then accelerate the fall towards the 144.00 round figure. The downward trajectory could eventually drag spot prices to the 143.40 intermediate support en route to the 143.00 mark.

On the flip side,  any strength beyond the 146.00 round figure might continue to attract fresh sellers and remain capped near the 146.50-146.55 supply zone. A sustained strength beyond, however, could trigger a short-covering rally and lift the USD/JPY pair beyond the 147.00 mark, towards the next relevant hurdle near the 147.35-147.40 region. Some follow-through buying could negative the negative outlook and pave the way for a move towards reclaiming the 148.00 mark.

USD/JPY 4-hour chart

• Amid a bullish momentum, the Euro has risen above $1.1170, its highest level since July 2023, as expectations of US interest rate cuts by the Federal Reserve have weakened the US dollar.
• The latest Federal Reserve minutes indicated the possibility of a US interest rate cut in September, with some speculation that it could reach 50 basis points due to recent revisions to non-farm payrolls.

In Europe, markets are awaiting key economic data that could influence the European Central Bank’s decisions, with expectations of a 65-basis point interest rate cut by the ECB in 2024.

Meanwhile, the euro price may take its direction from the results of the region’s purchasing managers’ index surveys, as a slight recovery in manufacturing and services activity is expected in Germany and France. Stronger-than-expected results could dampen hopes of immediate ECB easing, which could lead to a rise in the value of the common European currency.

At its meeting on July 30, several Federal Reserve officials acknowledged that a case could be made for cutting US interest rates before the central bank’s policy committee voted unanimously to keep rates unchanged. The meeting minutes, released on Wednesday in Washington, stated: “Several noted that the recent progress on inflation and the increase in the unemployment rate provided a reasonable case for reducing the target range by 25 basis points at this meeting or that they might have supported such a decision. A large majority noted that if incoming data evolved as expected, it would likely be appropriate to ease policy at the next meeting.”

On the stock trading front, European stocks close higher. Concurrently, European stocks held onto early gains and closed higher on Wednesday, recovering from the previous session’s slide to extend the stock market’s recovery from a selloff earlier in the month as investors continued to assess the outlook for growth and future credit costs. Furthermore, the euro zone’s Stoxx 50 index added 0.6% to close at a one-month high of 4,885, while the Stoxx 600 advanced 0.3% to close at 514. Consumer cyclicals dominated gains, with Hermes, Ferrari and Adidas adding between 3% and 1.2%. Mercedes, BMW, Volkswagen and Stellantis also gained between 1.5% and 0.5%, setting the pace for automakers.

Meanwhile, chip stocks outperformed the sector on Wall Street, with ASML and Infineon up about 1.5%. also, European investors mostly shrugged off the aggressive downward revision to U.S. payrolls data for the year to March, as they awaited minutes from the latest Federal Reserve meeting due after the closing bell.

EUR/USD Technical analysis and forecast:

EUR/USD is trending higher, forming higher lows connected by a bullish trend line that has held since early August. Furthermore, there could be another test of this support area as the pair stops at the 1.1135 area. The Fibonacci retracement tool shows levels where buyers might wait to join the rally. Also, the 38.2% Fibonacci retracement level is at 1.1065, then the 50% Fibonacci retracement level is at 1.1043 near the dynamic turning point of the 100 simple moving average. Moreover, the larger correction could reach the 61.8% Fibonacci retracement level closer to the trend line at 1.1021.

If any of these levels are able to keep losses under control, EUR/USD could resume its climb to a higher high or higher. Also, the 100 SMA is above the 200 SMA to indicate that the path of least resistance is up or that the upside is more likely to gain momentum than reverse.

At the same time, the Stochastic indicator is already pointing to overbought levels and looks ready to turn lower, indicating an increase in selling pressure. The oscillator has room to slide before reaching the oversold zone, so the correction may continue until that happens. Similarly, the RSI is in the overbought zone and looks ready to head lower, so the EUR/USD pair may follow suit as bearish pressures increase.

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