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US Dollar vs Japanese Yen Technical Analysis

The U.S. dollar has bounced just a bit during the early hours on Wednesday as it looks like we are trying to sort out whether or not we are going to consolidate and bounce or if we are going to consolidate and break down.

With that being said, the market is likely to be very noisy and very difficult to get your hands on. But I do have a couple of areas that I’m watching. If we could turn around and take out the 150 yen level, then we could really start to pick upward momentum as the carry trade would be coming back.

That being said, if we were to turn around and break down below the 144 yen level, then we could see the market really start to fall apart. With this being said, the market is going to remain very noisy. And I also think that we have the situation where it’s quite possible that range bound traders will come in and take advantage of this, but it certainly looks like we have stabilized a bit. And I think that’s the thing you need to take away from here.

Late in the day on Wednesday, we get the FOMC meeting minutes. And I think a lot of people will be paying close attention to what the Fed’s going to do going forward. If we do, in fact, see something shocking that could really move the market, but if it’s what people think it’s going to be, then we still have to ask the questions about the carry trade, whether or not it can come back. Right now, it looks like we’re in this just somewhat malaise of a market.

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

This article was originally posted on FX Empire

More From FXEMPIRE:

• The dollar fell after Fed minutes confirmed expectations for a Fed rate cut in September.

• Eurozone business activity strengthened in August.

• Negotiated wage growth in the Eurozone eased in the second quarter.

The EUR/USD outlook is optimistic as the dollar remains fragile after dovish Fed minutes. However, the euro fluctuated Thursday morning after mixed economic reports from the Eurozone. 

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The general trend for EUR/USD remained up as Fed minutes confirmed expectations for a Fed rate cut in September. Policymakers were ready to start lowering borrowing costs if economic data met expectations. July inflation data came out after the Fed policy meeting and showed an expected easing to 2.9%. Therefore, there is little holding the Fed back from cutting interest rates. As a result, the dollar has collapsed, allowing the euro to reach new highs.

Meanwhile, data on Thursday showed that Eurozone business activity strengthened in August, further boosting the euro. The composite PMI rose from July’s 50.2 to 51.2, while economists had expected the figure to drop to 50.1. This report reduced pressure on the European Central Bank to cut interest rates.

However, a separate report revealed that negotiated wage growth in the Eurozone eased in the second quarter. The figure fell from 4.74% to 3.55%. This is a key measure for the ECB and affects the outlook for rate cuts. Slow wage growth reduces economic demand, piling pressure on the central bank to lower borrowing costs. 

Currently, markets imply an over 90% likelihood of an ECB rate cut in September. Moreover, the central bank might cut again in December.

EUR/USD key events today

• US unemployment claims
• US flash manufacturing PMI
• US flash services PMI

EUR/USD technical outlook: Indecision signals looming retreat

On the technical side, the EUR/USD price has paused its rally near the 1.1150 resistance level. Bulls have moved steeply from the 30-SMA, breaking above resistance levels. The bullish bias has strengthened with the price well above the 30-SMA and the RSI in the overbought region. 

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However, price action shows indecision at the 1.1150 level after such a strong move. The price has made small-bodied candles with large wicks, indicating that neither bears nor bulls are strong. It also indicates exhaustion of the previous move. Therefore, the price might soon fall to retest the 30-SMA support.

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• GBP/USD trades at its highest level since July 2023 above 1.3100 on Thursday.
• S&P Global/CIPS Composite PMI in the UK improved to 53.4 in August.
• The US economic docket will feature S&P Global Services and manufacturing PMI data.

After closing the fifth consecutive trading day in positive territory, GBP/USD continued to edge higher on Thursday and touched its strongest level since July 2023 near 1.3130. Although the pair’s technical outlook continues to highlight overbought conditions, upbeat PMI data from the UK seems to be helping Pound Sterling hold its ground.

S&P Global/CIPS Composite PMI improved to 53.4 in August’s flash estimate from 51.9 in July, highlighting an ongoing expansion in the private sector’s business activity at an accelerating pace. 

Assessing the PMI survey’s findings, “August is witnessing a welcome combination of stronger economic growth, improved job creation and lower inflation, according to provisional PMI survey data,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

In the second half of the day, S&P will release preliminary August PMI data for the US. Investors expect the Composite PMI to retreat to 53.5 from 54.3 in July. A disappointing PMI reading close to, or below, 50 could revive fears over a downturn in the US economy and cause the US Dollar (USD) to continue to weaken against its rivals. On the flip side, a positive surprise could have the opposite impact on the USD’s valuation and make it difficult for GBP/USD to extend its rally.

GBP/USD Technical Analysis

GBP/USD trades near the upper limit of the ascending regression channel and the Relative Strength Index (RSI) indicator on the 4-hour chart stays above 80, reflecting overbought conditions. 

On the upside, strong resistance area seems to have formed at 1.3130-1.3140 (upper limit of the ascending channel, July 13, 2023, high) before 1.3200 (psychological level, static level).

1.3100 (psychological level) aligns as interim support before 1.3075 (mid-point of the ascending channel) and 1.3030 (lower limit of the ascending channel).

• The British Pound has reached a significant level against the US Dollar amid improving global investor sentiment.
• The GBP/USD exchange rate hit a new daily high of 1.3052 on Wednesday, its highest in over a month.
• This comes amid a continued recovery in the global stock market, which is focusing on growing expectations of interest rate cuts by the US Federal Reserve, pushing the broader US dollar to its lowest levels in seven months.

According to experts at Capital Economics: “The US dollar remains on the defensive as calm has quickly been restored in financial markets.”

The GBP/USD currency pair is particularly sensitive to global investor sentiment, tending to fall when markets are in “risk-off” mode and tending to rise when investor animal spirits are high. According to analysts, last week’s US economic data provided renewed support for a “soft landing” scenario, where the economy avoids a major and prolonged slowdown, aided by low inflation and low interest rates from central banks.

Commenting on the performance of the currency pair and the markets, Ruta Briskinet, Senior Forex Analyst at Convera, said: “The pound continues to benefit from the bearish outlook for the US dollar, especially given its strong performance this year. The pound is currently up around 2.0% year-to-date against the US dollar, making it the biggest winner among G10 currencies.”

Therefore, the immediate risk to GBP/USD is the Federal Reserve’s annual Jackson Hole conference in Kansas City, where Fed Chairman Powell is set to deliver a keynote speech on Friday. Analysts feel that while he may take a gloomy view on recent speculation of a 50bp rate cut in September, the overall message is likely to reassure market participants looking for confirmation that policy rate cuts are now imminent. As such, the USD may remain under pressure in the near term, although given how much the Fed has already discounted easing, we doubt there is further USD weakness ahead.

If this assessment holds true, GBP/USD could soon face resistance near its 2024 highs near 1.3130.

A more moderate market backdrop will be a key factor in determining the future performance of the pound, ensuring that any pullbacks are likely to be shallow. If the new calm persists, carry trade may re-emerge, and crucially, a return of carry trade would be supportive of the pound, as analysts believe this is the main driver behind its superior performance in 2024. Carry trade is where investors borrow in a low-interest-rate currency to invest in assets that carry higher interest rates, such as UK bonds. Consequently, this creates inflows that support the pound.

According to economists, US bond yields have weakened, and the dollar has retreated as traders bet that Powell will acknowledge a continued shift in the balance of risks facing the US economy, suggesting that the restrictive policy settings are no longer appropriate, and opening the door for an imminent easing decision. However, they do not believe that Jackson Hole will be the catalyst for the next phase of the rally. Analysts explain: “Fed Chair Powell is unlikely to put the Fed on a more aggressive easing path without sustained evidence of a turnaround in growth and employment, and investors may find themselves frustrated by the substance of his remarks.”

Technical forecasts for the GBP/USD pair today:

Based on the performance on the daily chart attached, the recent gains in the GBP/USD price are enough to push some technical indicators towards strong overbought levels. If the USD gains strong momentum from the announcement of the minutes of the last meeting of the US Federal Reserve today and the statements of the bank’s governor at the end of the week, the currency pair may be exposed to strong selling operations to take profits. Finally, we still prefer to sell the GBP/USD from every upward level and the closest resistance levels currently are 1.3085, 1.3120 and 1.3200 respectively.

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• The Japanese yen stabilized around 145.00 yen per dollar at the start of trading on Wednesday after hitting a two-week high in the previous session, supported by strong expectations that the Federal Reserve will soon begin cutting US interest rates.
• Several Federal Reserve officials have warned of growing risks to the US labor market and broader economy, indicating a readiness to cut borrowing costs next month.

In Japan, data earlier this week showed that machinery orders, an indicator of capital spending, rose 2.1% month-on-month in June, exceeding expectations of a 1.1% increase. Data released last week also showed that the country’s economy expanded 0.8% on a quarterly basis in the second quarter, reversing a contraction of 0.6% in the first quarter and exceeding expectations of 0.5%.

On an annual basis, Japan’s economy grew 3.1% in the second quarter, reversing from a 2.3% decline in the first quarter and beating expectations of 2.1%. Now, markets are looking ahead to domestic inflation figures later this week for clarity on the Bank of Japan’s monetary policy path.

On the stock trading front, U.S. stocks ended a choppy session lower on Tuesday as investors awaited signals from the Federal Reserve on future U.S. interest rate cuts. The S&P 500 and Nasdaq 100 ended an eight-day rally, closing down 0.2% each, while the Dow Jones Industrial Average lost 61 points.

Meanwhile, the volatility has been on the rise ahead of the upcoming Jackson Hole symposium and the release of the Fed’s latest policy meeting minutes, which could provide clues on the potential size of the U.S. interest rate cut expected in September. Overall, energy and materials stocks were among the worst performers, while health and consumer staples posted the biggest gains. In corporate news, Lowe’s shares fell 1.2% after it missed revenue expectations and cut earnings forecasts, despite beating second-quarter earnings estimates. Also, Boeing shares fell 4.2% after grounding its 777X test fleet due to structural cracks. Meanwhile, Palo Alto Networks rose 7.1% on strong Q4 results and upbeat guidance, while Eli Lilly gained 3% after positive results for its weight-loss drug tripeptide.

USD/JPY Technical Analysis and Expectations Today

Based on the daily chart attached, the bearish trend in USD/JPY is strengthening and the next strong targets for the JPY are 143.50 and 142.00 respectively. From the latter level, it is best to think about buying the currency pair as moving towards it will move technical indicators towards strong oversold levels. On the other hand, the psychological resistance of 150.00 will remain the most important for the bulls to regain initial control over the trend. The currency pair will remain on its current path until the markets and investors react to the announcement of the minutes of the last meeting of the US Federal Reserve today, and then the statements of the bank’s governor, Jerome Powell, at the end of the week.

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EUR/USD Current price: 1.1126

• The Federal Open Market Committee will release the Minutes of the July meeting.
• Financial markets turned cautious, but the US Dollar maintains its weak tone.
• EUR/USD is technically overbought but has room to extend its gains.

The EUR/USD pair keeps advancing on Wednesday,  flirting with the December 2023 high at 1.1138 ahead of Wall Street’s opening. The US Dollar remains pressured despite a worsening market mood, as interest revolves around the September Federal Reserve (Fed) monetary policy meeting and whatever can influence policymakers’ decisions then.

Financial markets are “convinced” the Fed will trim interest rates when it meets next month, although it’s still unsure about the extension of such a cut. Most investors are betting for a 25 basis points (bps) trim, while the odds for a 50 bps cut stand at around 35%, according to the CME FedWatch Tool. As a result, US indexes rallied with optimism and stood near record highs while speculative interest abandoned the USD.

Markets turned cautious ahead of the Federal Open Market Committee (FOMC) meeting Minutes. The document will be released in the American afternoon but will likely have a limited impact on financial markets, given that the latest comments from Fed officials reinforced the idea of a September rate cut dropped by Fed’s Chairman Jerome Powell when the meeting took place.

EUR/USD short-term technical outlook

The daily chart for the EUR/USD pair shows it trades around its daily opening, with technical indicators still heading higher within overbought levels. The Relative Strength Index (RSI) indicator, however, has partially lost its bullish strength, reflecting the ongoing corrective slide and still far from suggesting a downward correction. At the same time, the 20 Simple Moving Average (SMA) turned north almost vertically, reflecting buyers’ strength, but is now too far below the current level to become relevant.

In the near term, and according to the 4-hour chart, the risk is also skewed to the upside. Technical indicators have retreated from their recent highs but are far from suggesting an upcoming decline, as the Momentum indicator consolidates well above its 100 level while the RSI indicator aims marginally higher at around 76. Furthermore, all moving averages turned sharply bullish below the current level, which aligns with the dominant bullish trend.

Support levels: 1.1050 1.1020 1.0985  

Resistance levels: 1.1090 1.1120 1.1160

• The first thing I notice is that we have given back an attempt to break out to the upside and it suggests that perhaps we are not quite ready to see enough momentum come into the market to push things to the upside for a bigger move.
• That being said, the market will continue to look at the ¥98 level as an area of importance, and I do believe that if we break down below there we could go looking to the ¥96.50 level.

On the other hand, if we were to turn around and rally from here, we need to keep a close eye on the 200-Day EMA, which is near the ¥100 level, which in and of itself will attract a lot of attention as well. If we can break above there, then the market is likely to go much higher, perhaps reaching toward the ¥103 level. In general, this is a market that I think continues to be noisy, especially as there are a lot of questions asked about the overall risk appetite of traders around the world.

Carry Trade Over?

At this point, a lot of traders are starting to ask whether or not the carry trade is over. This involves borrowing Japanese yen and buying assets in other parts of the world as there are massive amounts of interest rate differentials out there that you can pick from, and of course Australia is one of the places that people go looking to in order to make money on the Japanese yen loans. By purchasing bonds that pay more, as long as the currency markets are relatively stable, this is a situation where people just simply “print money.”

The question now is whether or not the carry trade is over. Pay close attention to the overall monetary flows around the world, and you should also keep in mind that this is why JPY-related pairs all tend to move the same, because it’s all about the carry trade. In other words, you can watch other currency pair is to get a bit of a “heads up” as to where this market might go.

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