• Recently, the GBP/USD currency pair has risen to its highest level in two years, following Powell’s call for a reduction in US interest rates.
• The GBP/USD gains reached the resistance level of 1.3230, the highest for the currency pair in more than a year and closed last week’s trading stable around these gains.
• For his part, Federal Reserve Chairman Jerome Powell, in a clear indication that US interest rates are about to decline, said, “The time has come to adjust policy.”

According to reliable trading platforms, the US dollar has reached its lowest level in two years against the British pound after Powell delivered these prepared remarks to delegates at the Jackson Hole economic symposium, which virtually agreed to cut interest rates next month.

However, the September cut is not new news; nor is the new news that the markets have received a signal that the Federal Reserve is ready to commit to further cuts in the coming months. Powell added, saying, “The slowdown in Labor market conditions is unambiguous. And it seems unlikely that the Labor market will be a source of elevated inflationary pressures anytime soon.”

The GBP/USD exchange rate had risen to 1.32 – its highest level in two years – after financial markets tested further comments that “we are neither seeking nor welcoming further softening in labor market conditions.

This is a clear indication that the US Federal Reserve is now ready to defend growth to ensure that US job losses are reduced in the coming quarters. This will involve easing policies, which could boost risk assets such as stocks and the British pound. Powell said, “The time has come to adjust policies,” also said, “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, evolving expectations, and the balance of risks.”

He added, “We will do our best to support a strong labor market while making further progress toward price stability.

Overall, the comments increase the likelihood of a 50bp rate cut in September, a step forward from the 25bp move that the dollar had priced in before Powell’s speech.

This rise in expectations explains the sell-off in the US dollar.

Commenting on this, Nigel Green, CEO of deVere Group, said, “The Fed must cut US interest rates by 50 basis points in September to avoid a recession.” Added, “Consumer confidence is shaky, spending is, and corporate profits are under threat. The Fed cannot afford to skirt around these warning signs with a cautious 25 basis point cut. “It’s simply not enough.”

However, Roger Quadvlieg, economist at ABN AMRO, says slowing that despite the relatively dovish tone, he still expects a 25bp cut as the broader picture continues to allow for a gradual easing cycle. Also, he added that he expects continued volatility as financial markets fluctuate between expectations of a 50bp cut or a more modest 25bp move, especially since there is another set of inflation and jobs data that still need to be considered before the September decision.

Technical forecasts for the GBP/USD pair today:

The general upward trend in the GBP/USD price is gaining strength, considering that its recent gains were enough to push all technical indicators towards strong overbought levels. If the dollar finds a chance to recover, the GBP/USD pair may be exposed to strong profit-taking sales. Consequently, we still prefer selling the GBP/USD from every upward level. The current bullish control will be on a date with the announcement of the US inflation reading preferred by the US Federal Reserve, statements by global central bank officials, and the extent of investors’ appetite for risk or not. The closest resistance levels for the GBP/USD are 1.3275 and 1.3330, respectively.

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• The Japanese Yen appreciated last Friday following a statement by Kazuo Ueda, Governor of the Bank of Japan.
• Also, the USD/JPY exchange rate retreated to 145.53 before a decisive statement from Jerome Powell, Chairman of the Federal Reserve.
• The currency pair had retreated by more than 10.18% from its highest point this year, meaning it was in a correction.
• Meanwhile, losses for the USD/JPY reached the support level of 144.05 before closing the trading session stable around the level of 144.33.

Rate hike by the Bank of Japan

According to reliable trading platforms, the USD/JPY pair fell as signs of divergence between the US Federal Reserve and the Bank of Japan emerged. In a statement before the Japanese parliament on Friday, Ueda indicated that the Bank of Japan may consider further interest rate hikes to combat stubbornly high inflation. Furthermore, such a move would mean that the divergence will continue because the US Federal Reserve will continue.

At the same time, recent economic data has shown that inflation in Japan has remained at a higher level in the past few years. The core consumer price index has remained at 2.8% for the past three months in a row, up from its year-to-date low of 2.2%. Overall, inflation in Japan remains lower than most countries. In the US, the core CPI fell to 2.9% in July, while in Australia it rose to 3.8% in the last quarter. However, the Japanese figure is notable because the country has not experienced any inflation in the past few decades.

For its part, the Bank of Japan hopes that its hawkish tone will lead to a relatively stronger currency that will make imports such as crude oil and natural gas cheaper in the country. Also, the Bank of Japan’s interest rate hike is important because other global central banks have either started or are considering cutting interest rates. In Europe, the European Central Bank has already cut interest rates from 4.50% to 4.25%.

Similarly, the Bank of England cut interest rates by 0.25% at its last meeting, while the Federal Reserve hinted that it would cut them in September.

Moreover, the Japanese Yen appreciated as hedge funds and other speculators turned bullish for the first time since 2021. In its latest Commitment of Traders report, the Commodity Futures Trading Commission said that net long positions by speculators such as hedge funds moved to 23,000 a week earlier. These funds had been very negative on the Japanese Yen, with the Commitment of Traders figure falling to a negative 184,000 in July.

Jackson Hole Symposium

Friday was an important day for the USD/JPY pair because Jerome Powell delivered a speech at the Jackson Hole Symposium, an annual gathering of central bank governors and economists. With no Federal Open Market Committee (FOMC) meeting this month, this meeting will be the main platform for Powell to provide hints on what to expect. The speech will come a day after the FOMC released its minutes, which showed that some members of the committee considered cutting interest rates at the last meeting.

Also, it will come after the Bureau of Labor Statistics revised up nonfarm payrolls (NFP) for the 12 months through May by more than 818,000, the largest number since 2009. The figures suggest the Labor market was weaker than expected and the unemployment rate could be higher than the current 4.3%. As such, the base case among many analysts is that Powell will signal a rate cut in September. While some analysts expect a large 0.50% cut, most believe the bank will cut by 0.25%. It is also likely to deliver at least two more cuts by the end of the year.

The Fed’s view was supported by the energy sector, with Brent and West Texas Intermediate (WTI) prices falling to $77.3 and $73, respectively. As a result, gasoline prices fell to their lowest level in more than 6 months, which means that inflation could continue to decline. Therefore, the Fed’s rate cuts, and the Bank of Japan’s rate hikes have narrowed the interest rate differential between the two countries. Thus, this differential could continue to narrow if the Bank of Japan continues to raise interest rates at its next meeting on September 20.

For a long time, the interest rate differential between the two countries has led to a risk-free carry trade opportunity that is now starting to ease.

USD/JPY Technical Analysis and Expectations Today

The USD/JPY exchange rate has been in a strong sell-off in the past few months. During this period, it has declined from its year-to-date high of 161.83 to 146. It is worth noting that the pair is about to form a death cross where the 200-day and 50-day moving averages are crossing each other and the US Dollar Index (DXY) is intensifying its decline. Technically, the MACD indicator has remained below the neutral point but is pointing up. Similarly, the Relative Strength Index (RSI) has moved slightly above the oversold level. Therefore, the USD/JPY pair is likely to continue to decline, with the next target to watch being this month’s low at 141.65 followed by the support at 140.00, its low point from December last year.

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EUR/USD Current price: 1.1160

• The German IFO survey came in better than anticipated but fell short of supporting the Euro.
• The United States Durable Good Orders more than doubled expectations in July.
• EUR/USD could correct lower in the near term, but bulls hold the grip.

The EUR/USD pair eases from its recent highs at around 1.1200 despite persistent risk appetite. The pair rallied on Friday following comments from Federal Reserve (Fed) Chairman Jerome Powell at the Jackson Hole Symposium. Powell kept paving the way for a September interest rate cut, saying that “the time has come for policy to adjust.” As usual, he maintained a dose of caution, adding that the timing and pace of rate cuts will depend on “  incoming data, the evolving outlook, and the balance of risks.”

Nevertheless, financial markets rushed to price in lower borrowing costs in the United States (US). As a result, Wall Street posted solid gains, while the US Dollar edged lower against most major rivals. The new week, however, brought an additional dose of caution, as the US will publish later this week the Personal Consumption Expenditures (PCE) Price Index, the Fed’s favorite inflation gauge. Should the figures show further easing inflationary pressures, market players will likely increase bets on a 50 basis points (bps) rate cut. So far, uncertainty gyrates around the depth of the September cut.

In the meantime, Germany published the August  IFO Business Climate index, which printed at 86.6, easing from 87 in July, although better than the 86.5 expected. Expectations also beat the forecast, hitting 86.8, while the assessment of the current situation eased from 87.1 to 86.5.

Across the pond, the US released July Durable Goods Orders, which rose 9.9% in the month, much better than the 4% expected. The positive US news had no relevant impact on the USD.

EUR/USD short-term technical outlook

The EUR/USD pair trades in the 1.1160 price zone following the release of American data. Technical readings in the daily chart suggest that bulls paused, but also that they retain control. The pair trades far above all its moving averages, with the 20 Simple Moving Average (SMA) maintaining an almost vertical slope at around 1.0980. The 100 and 200 SMAs, in the meantime, advanced just marginally well below the shorter one. Finally, technical indicators hold well above their midlines, although missing directional strength.

The 4-hour chart shows that a bullish 20 SMA provides near-term support at around 1.1145, while longer moving averages retain their bullish strength, although they are below the 1.1000 mark. Technical indicators, in the meantime, ease sharply but remain above their midlines, limiting the odds for a steeper decline.

Support levels: 1.1145 1.1100 1.1065

Resistance levels: 1.1210 1.1250 1.1290

• 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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• The Pound Sterling buyers were unstoppable against the US Dollar amid a Fed-BoE policy divergence.
• GBP/USD eyes more gains as top-tier US economic data are set to dominate the week ahead.
• The Pound Sterling flirts with overbought territory on the daily RSI, what’s next?

The Pound Sterling (GBP) clinched a second consecutive weekly gain against the US Dollar (USD), as the GBP/USD pair reached its highest level since March 2022, above 1.3200.

Pound Sterling stands tall as US Dollar wilted

GBP/USD witnessed another blockbuster week, devoid of high-impact economic events from the United Kingdom (UK). The underlying positive tone around the major was mainly driven by the sustained weakness in the US Dollar against its major rivals.

Traders continued to retain their bearish outlooks on the Greenback, as dovish US Federal Reserve (Fed) expectations heightened in the Jackson Hole Symposium week. USD buyers stayed on the back foot in the run-up to the Minutes of the Fed’s July meeting and Chairman Jerome Powell’s speech due later in the week.

Despite a risk-averse market environment, the US Dollar failed to find the safe-haven demand amid nervousness ahead of Powell’s appearance. The Greenback received a fresh blow following Wednesday’s release of the outright dovish Fed Minutes.

Most policymakers thought that “if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting,” the Minutes said. Further, the Minutes read that other policymakers would have even been willing to reduce borrowing costs in the July meeting itself.

The Nonfarm Payrolls Benchmark Revision further cemented a Fed rate cut for September. The US Labor Department said that the NFP for the period from April 2023 to March 2024 was lowered by 818,000. The revision represented a total downward change of about 0.5%.

Weak US S&P Global preliminary Manufacturing Purchasing Managers’ Index (PMI) and Jobless Claims data on Thursday bolstered bets for a dovish policy pivot as early as September.

Markets priced in a 27% probability of 50 basis points (bps) cut at the Fed’s September 17-18 meeting and a 73% chance of a 25 bps reduction, according to the CME Group’s FedWatch Tool.

With traders moving away from their US Dollar longs, GBP/USD hit a fresh 13-month high of 1.3130, also helped by strong UK S&P Global preliminary business PMIs. UK Manufacturing PMI improved from 52.1 in July to 52.5 in August. Markets had expected a 52.1 print. Meanwhile, the preliminary UK Services Business Activity Index rose to 53.3 in August, compared to July’s 52.5 and the estimated 52.8 figure.

The Fed-BoE monetary policy divergence remained in play and acted as a tailwind for the Pound Sterling, as the US Dollar stood on thin ice, awaiting Powell’s words.

Powell noted that the time has come for the monetary policy to adjust and said that they do not welcome a further cooling in labor market conditions. “We will do everything we can to support a strong labor market as we make further progress toward price stability,” he added. The USD came under renewed selling pressure with the immediate reaction, allowing GBP/USD to climb above 1.3200 for the first time since March 2022.

Week ahead: US growth and inflation data on tap

Following the volatility in the Jackson Hole Symposium week, Pound Sterling traders catch their breath amid a holiday-shortened week.

The UK markets closed on Monday in observance of the Summer Bank Holiday. Later that day, the US economic calendar will feature the Durable Good Orders but the data is unlikely to have a significant impact on the value of the US Dollar and the GBP/USD pair.

The main highlight of the week is expected to be the second estimate of the US Gross Domestic Product (GDP) report and the core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure.

In the first half of the week, the UK CBI Realized Sales and the US Conference Board Consumer Confidence data will offer some trading incentives.

Sentiment around the central banks’ policy expectations, speeches from Fed officials and the Middle East geopolitical risks will continue to drive the GBP/USD price action.

GBP/USD: Technical Outlook

The GBP/USD recovery from five-week lows of 1.2665 gathered strength in the past week, as buyers stormed through the previous year-to-date (YTD) high at 1.3045 to reach a 29-month-high above 1.3200.

In doing so, Pound Sterling went further beyond all the key daily Simple Moving Averages (SMA). The 14-day Relative Strength Index (RSI) entered the overbought territory, currently near 75.

With overbought conditions, Pound Sterling traders could see a brief correction, with every pullback likely to be bought into so long as the leading indicator holds above the 50 level.

GBP/USD could meet interim resistance at 1.3250 before buyers aim for the 1.3300 round level.

In case of a corrective downside, the previous YTD high at 1.3045 will be the initial contention point, below which the 1.3000 key level will be tested.

If the selling momentum intensifies, the 1.2900 level will be threatened, followed by the confluence zone around 1.2850. At that level, the 50-day SMA and the 21-day SMA hang around.

US Dollar vs Japanese Yen Weekly Technical Analysis

The U.S. Dollar has fallen against the Japanese Yen during the week to test the 145 yen level but has also levitated a bit. The question is, now that we are below an uptrend line, do we stay below it or do we turn around and break out to the upside, giving a bit of a false breakout?

And that being said, I think we are trying to figure out which direction to go. And with that being said, if we can turn around and take out the 150 yen level, we could go much higher. That would bring back in the carry trade from what I see. And it’s worth noting that Jerome Powell has a speech late in the day on Friday from Jackson Hole that could give us a heads up as to just how loose the Federal Reserve may get.

If it sounds like not very, it’s probably only a matter of time before the carry trade picks up again and we go higher. On the other hand, if we turn around and break down below the 144 yen level, then we could see further selling and probably more wrecking of financial markets. In general, this is a market that I think continues to see a lot of volatility, but I do think you should remember, you get paid at the end of every day to hang on to this pair, so there is going to be a proclivity for people to try to get involved.

Furthermore, when I adjust the trend line, you could make it go through where we are right here as well. So, a lot is going on in this chart, and we do have a couple of major levels that could give us an idea of where we go for the next several weeks.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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