• The daily analysis of the GBP/JPY shows that we have had a major break out to the upside, as we have cleared the crucial ¥190 level.
• This is an area that I think continues to attract a lot of attention due to the fact that it is a large round psychologically significant figure, and it had previously offered resistance for several days in a row.

One of the things it seems to have kicked off the carry trade again as the idea that the US economy is not slowing down as drastically as people had hoped, and therefore the interest rate differential between the Japanese yen and almost everything else should continue to remain quite wide. After all, the Bank of Japan cannot necessarily tighten monetary policy for a significant amount of time, at least not without wrecking the Japanese economy itself.

Interest Rate Differential

The interest rate differential between the British pound and the Japanese yen is essentially a mile wide, and as long as that’s going to be the case, it makes a lot of sense that traders will be hanging onto this pair as you get paid to do so. With that being the case, I like the idea of buying short-term pullbacks, with perhaps the area right around the ¥190 level as a short-term support level. On the other hand, if we break above the 200-Day EMA, then the market could go looking to the ¥195 level next, which has seen a bit of action in the past.

The size of the candlestick is of course very bullish, and that does suggest that we have more momentum in this market to burn off, meaning that we could go much higher. However, if we were to turn around a breakdown below the ¥188 level, that could send this market crashing back toward the ¥183 level underneath which has been an area of significant noise in the recent past. Ultimately, that’s the least likely of scenarios but it is something that you need to keep in the back of your head just in case.

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“They won’t be able to hike again, at least for the rest of the year. It’s a toss-up whether they can do one hike by next March.”

US Economic Calendar

Later in the session on Monday, the US Leading Economic Index (LEI) may influence US dollar demand.

Economists forecast the LEI to fall by 0.3% in July after a 0.2% decline in June. A larger-than-expected fall may rekindle fears of a hard landing, supporting a USD/JPY move toward 145. The LEI offers insights into the US economic outlook, affecting sentiment toward the Fed rate path.

Beyond the economic data, FOMC member commentary also needs consideration. Voting member Christopher Waller will speak on Monday. In July, Waller stated that favorable CPI Reports could support a rate cut soon. A shift in stance regarding interest rate cuts could affect US dollar demand amid speculation about multiple 2024 Fed rate cuts.

Expert Views on the Fed Rate Path

Arch Capital Global Chief Economist Parker Ross remarked on the US CPI Report and the Fed rate path, stating,

“Core services inflation (0.31% m/m) – the sticky component the Fed has been worried about – bounced back in July from its weakest monthly reading since 2021.”

Short-term Forecast: Bearish

USD/JPY trends will depend on the US LEI, central bank forward guidance, and Services PMI numbers. Support for a Q4 2024 BoJ rate hike could pull the USD/JPY toward 145.  Weak stats from the US and a more dovish FOMC may also signal a drop toward 145.

Investors should remain alert. 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 remained well below the 50-day and 200-day EMAs, affirming bearish price signals.

A USD/JPY break above the 148.529 resistance level and the top trend line would support a return to 150. Furthermore, a breakout from 150 could give the bulls a run at the 200-day EMA and the 151.685 resistance level. Selling pressure may intensify at the 151.685 resistance level as the 200-day EMA is confluent with the resistance level.

Economic indicators from the US and central bank commentary require consideration on Monday.

Conversely, a fall through 147.500 could signal a fall toward the 145.891 support level. A break below the 145.891 support level may bring the 143.495 support level into play.

The 14-day RSI at 39.06 indicates a USD/JPY drop below 147 before entering oversold territory.

USD weakness in the medium term

“We have changed our EUR/USD forecast. As regular readers know, we believe that a good part of the USD strength seen so far was based on the impression of a structural US growth advantage and a particularly active US monetary policy. Since we now have to assume that this impression will be eroded by actual developments in the coming quarters, we now have to assume USD weakness in the medium term.”

“And because at the same time the EUR-negative argument of high eurozone inflation rates and a fairly relaxed ECB monetary policy is at least significantly weakened in view of our more moderate eurozone inflation forecast, some of the EUR-negative arguments also fall away. Both together mean that we now have to assume that EUR/USD will rise significantly. We consider levels around 1.14 to be possible by mid-2025.”

“In the second half of 2025, the picture could change again. If – as we expect – the US economy picks up again, the impression may arise that the Fed at least no longer has any scope for interest rate cuts, and perhaps even fantasies of interest rate hikes will make themselves felt again. And perhaps it will then be time again for the market to take a more skeptical view of the ECB’s monetary policy.”

• The Pound Sterling hit a two-week high against the US Dollar, extending its recovery from five-week lows.
• GBP/USD buyers to retain control as eyes turn to Fed Minutes, PMI data and Jackson Hole Symposium.
• The path of least resistance appears to the upside for the Pound Sterling amid bullish technicals.

The Pound Sterling (GBP) sustained the rebound and hit a two-week high against US Dollar (USD), driving the GBP/USD pair to the 1.2900 mark amid a data-dominated week.

Pound Sterling cheered Fed-BoE policy divergence

GBP/USD rebounded strongly this week, helped by the return of risk flows and divergent monetary policy outlooks between the US Federal Reserve (Fed) and the Bank of England (BoE).

The high-impact economic data releases from both the US and the UK underscored the central bank’s imbalances regarding their potential policy action. Earlier in the week, strong UK employment data and hot Consumer Price Index (CPI) data prompted investors to dial down their expectations of the BoE lowering interest rate in September.

The annual UK inflation increased to 2.2%, rising back above the BoE’s 2.0% target, the Office for National Statistics (ONS) said, slightly less than the median forecast of 2.3%. Meanwhile, UK employment data was a positive surprise, with the Unemployment Rate falling from 4.4% to 4.2% in the quarter to June, beating market expectations of an increase to 4.5%. These figures were boosted by an increase in part-time jobs.

Data published by the ONS showed Friday that the UK Retail Sales rebounded 0.5% over the month in July after dropping 1.2% in June, aligning with the market forecast of a 0.5% increase in the reported month. The Core Retail Sales, stripping the auto motor fuel sales, jumped 0.7% MoM, against the previous decline of 1.3%, a tad softer than expectations. 

On the other hand, strong US Retail Sales and Jobless Claims data combined with a benign inflation report suggested that a September rate cut from the Fed is very well on the table. Retail Sales in the US climbed 1% on the month, according to numbers adjusted for seasonality but not for inflation, beating the expectations of a 0.3% increase by a wide margin. Meanwhile, Initial Jobless claims for the week ended Aug. 10 came in at 227,000, a drop of 7,000 from the previous week and lower than the estimate for 235,000.

The annual US CPI inflation slowed for a fourth consecutive month to 2.9% in July 2024, the lowest since March 2021, compared to 3.0% in June and below forecasts of 3.0, the monthly CPI rebounded 0.2% last month after falling 0.1% in June, the Labor Department’s Bureau of Labor Statistics (BLS) said on Wednesday. 

Markets are now pricing in just a 25% chance of a 50 basis points (bps) cut from the Fed next month, down from 55% a week ago, according to the CME Group’s FedWatch tool. However, the odds of a 25 bps September rate reduction still hold above 70%.  

Other than policy divergence, risk sentiment remained in a sweeter spot almost throughout the week, following the previous week’s volatility that roiled it. No fresh signs of Middle East geopolitical escalation between Iran and Israel calmed nerves while encouraging US macro news alleviated recession fears.

Although Iran continued to issue warnings against an imminent attack on Israel, no such action was undertaken. Amongst the latest developments, the Israeli Defense Ministry reportedly imposed sanctions on 18 oil tankers transporting Iranian oil to cut down Iran’s vital fuel sale revenues. Iran’s Supreme Leader Ayatollah Ali Khamenei issued a warning on Thursday against any form of retreat or compromise, invoking the concept of “divine wrath”.

Fed Minutes to stand out in the Jackson Hole Symposium week

With the inflation reports from both sides of the Atlantic now out of the way, Pound Sterling traders eagerly await the Minutes of the Fed’s July policy meeting for fresh cues on the interest-rate outlook.

The Fed Minutes will be reported on Wednesday. The first two days of the week are devoid of any significant economic news from the UK and the US. However, Atlanta Fed President Raphael Bostic’s speech on Tuesday could offer some trading impetus.

Thursday will feature the UK and the US S&P Global preliminary Manufacturing and Services PMI data while the usual US weekly Jobless Claims and Existing Home Sales data will be also eyed.  

The three-day annual Kansas City Fed’s Jackson Hole Symposium will be held on Thursday, with key central banks’ officials likely to speak.

Fed Chair Jerome Powell is due to speak at the Symposium on Friday at 14:00 GMT, followed by BoE Governor Andrew Bailey’s speech at 19:00 GMT. Ahead of that the US New Home Sales will be published.

Sentiment around the central banks’ policy expectations will remain a key driving force in the week ahead, with traders also focused on the Middle East geopolitical escalation between Iran and Israel.

GBP/USD: Technical Outlook

Having defended the crucial 200-day Simple Moving Average (SMA), now at 1.2676, GBP/USD built a solid recovery from five-week lows of 1.2665.

In doing so, Pound Sterling buyers recorded a fresh two-week high just shy of the March 8 high of 1.2893 after recapturing the key 21-day SMA resistance at 1.2825 on a sustained basis.

With the 14-day Relative Strength Index (RSI) pointing north above the 50 level, currently near 56.50, the bullish potential remains intact for the British Pound.

If buyers manage to yield a weekly closing above the March 8 high of 1.2893 or the 1.2900 round figure, a fresh uptrend toward the 1.3000 psychological level cannot be ruled.

Next, the July high of 1.3045 will come into the picture, as buyers would aim for further upside to the 1.3100 level.

On the downside, the 21-day SMA resistance-turned-support at 1.2825 could come to the immediate rescue of buyers, below which the 50-day SMA at 1.2793 will be challenged.

On a sustained break of the 50-day SMA cap, additional declines could be seen toward the 1.2680 demand area, where the 100-day SMA and the 200-day SMA close in.

Thereafter, the June low of 1.2613 and the mid-May low at around 1.2510 will be the next bearish targets.

• US retail sales rose 1.0% in July.

• The likelihood of a 50 bps Fed rate cut in September dropped to 25%.

• US jobless claims fell last week to 227,000.

The USD/JPY outlook paints a bullish picture as the dollar trades near a two-week high against the yen after positive US sales data. Meanwhile, the rate-sensitive yen was weak as US Treasury yields rose amid a decline in Fed rate cut expectations. At the same time, the outlook for Bank of Japan rate hikes remained clouded due to political uncertainty.

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The US dollar made a solid bullish move on Thursday after US retail sales rose 1.0% in July. This increase was much bigger than the forecast of a 0.3% gain. Moreover, it showed that the US consumer was resilient. As a result, the likelihood of a 50 bps Fed rate cut in September dropped to 25%. Meanwhile, US Treasury yields rose, weighing on the yen. 

Another report revealed that US jobless claims fell last week to 227,000, below forecasts for 235,000. The report reduced fears that the labor market was deteriorating. Low unemployment points to high demand and a tight market. 

The upbeat US economic reports followed inflation data showing a moderate increase. As a result, the market is optimistic that the Fed might achieve a soft landing. 

On the other hand, the yen was fragile on Friday amid political uncertainty in Japan. Prime Minister Fumio Kishida recently decided to step down, leaving a big gap. He greatly supported the Bank of Japan’s recent hiking cycle. Consequently, analysts believe the BoJ might pause until there is more political certainty before hiking interest rates. 

USD/JPY key events today

There will be no key economic reports from the US or Japan, so investors will continue absorbing yesterday’s reports.

USD/JPY technical outlook: Bulls approach 0.618 Fib retracement level

On the technical side, the USD/JPY price has made a sharp, bullish move, detaching from the 30-SMA and the 0.382 Fib level. At the same time, the RSI moved nearer the overbought territory, indicating solid bullish momentum. 

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The price is approaching a solid barrier comprising the 150.03 resistance and the 0.618 Fib level. Since the bullish bias is strong, the price might soon breach this barrier to make new highs. Such a move would clear the path for bulls to revisit the 155.01 resistance.

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