• The pound sterling declined to $1.2710, nearing a one-month low, as investors anticipate faster interest rate cuts from the Bank of England.
• This decline comes amid fears of a US recession, which has also caused UK government bond yields to fall to multi-month lows.
• Now, markets expect a quarter-point interest rate cut from the Bank of England by December.

On Monday, interest rate futures pointed to a total of 56 basis points of cuts this year, compared to the 47 basis points expected on Friday. In addition, the yield on two-year government bonds, which reflect changes in borrowing costs, fell 8 basis points to 3.526%, the lowest since April 2023. Last week, the Bank of England cut its benchmark interest rate from a 16-year high of 5.25% to 5.0%, the first cut since 2020.

And love electronic trading platforms, the yield on the UK’s 10-year bond fell to a six-month low. According to the performance, the yield on the UK’s 10-year bond fell below 3.8%, the lowest level in six months, as investors increasingly bet on the Bank of England implementing further rate cuts in response to concerns about a possible recession in the United States. Concurrently, markets are expecting a quarter-point rate cut by December, with futures pointing to a 56-basis point cut by the end of the year, up from 47 basis points on Friday.

Last week, the Bank of England cut interest rates by 25 basis points to 5% from a 16-year high of 5.25%, the first cut since 2020. Meanwhile, the UK’s new chancellor of the exchequer announced a series of public spending cuts and strongly hinted that there would be tax increases in the autumn budget to offset part of the £22 billion funding gap.

According to stock trading platforms, the US stock market faced significant declines as trading entered its final hour on Monday, continuing a recent trend of increased volatility. According to trading, the S&P 500 index fell 3.3%, with losses fluctuating throughout the day. During the morning session, the index fell 4.3%, but by lunchtime, it had managed to trim its decline to around 1.8%.

S&P 500, Nasdaq Composite lead declines

The S&P 500’s 3.3% drop mirrored the broader market’s struggles, but the tech-heavy Nasdaq Composite saw even sharper losses. The Nasdaq fell 3.8% as tech stocks, which have been under pressure in recent days, resumed selling. Additionally, the Russell 2000, which focuses on small-cap companies, also saw a sharp decline, falling 3.7%.

Treasury yields add to market volatility

Adding to the market turmoil, the yield on the policy-sensitive 2-year Treasury note saw notable volatility. It ended the day slightly higher at 3.89%. Overnight, the yield fell to a 16-month low but managed to rally to 3.95% in the afternoon. Furthermore, the reversal in Treasury yields underscores the uncertain environment investors are navigating.

Market sentiment and future expectations

The continued volatility in the US stock market was driven by a combination of economic data, geopolitical concerns and investor sentiment. Moreover, the sharp decline in the morning followed by a partial recovery and then another decline suggests that the market is struggling to find direction amidst conflicting signals. Investors are grappling with various factors, including the Fed’s monetary policy stance, inflationary pressures and a potential economic slowdown. Overall, the technology sector, which was previously an important driver of market gains, is now witnessing a clear sell-off, contributing to broader market instability.

Technical forecasts for the GBP/USD pair today:

According to the performance on the daily chart, the downward trajectory of the GBP/USD price is strengthening. As we mentioned before, moving around and below the 1.2700 level will strengthen the bears’ control over the trend and thus prepare for stronger losses. Technically, the next important support will be 1.2580. On the other hand, and over the same time frame, the psychological resistance of 1.3000 will remain the most important for the general trend to turn to the upside.

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• Investors panicked on Monday that the US economy was heading for a recession.

• The ISM reported that the services PMI rose from 48.8 in June to 51.4 in July.

• Markets are pricing in a 75% chance of a 50-bps Fed rate cut in September.

The USD/JPY outlook is slightly bullish as the yen pauses its five-session rally. At the same time, the dollar recovered after data in the previous session revealed a rebound in the US services sector in July. 

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The yen retreated after reaching a new high in the previous session amid safe-haven demand. Notably, there was panic in the markets on Monday that the US economy was heading for a recession. These fears came from recent economic data showing a surge in the unemployment rate to a three-year high of 4.3%. 

Furthermore, US equities sold off due to poor earnings reports, which fueled recession fears. Traditional safe-haven assets like the yen have gained amid these concerns. However, this rally paused Monday after the US released service sector activity data. 

The ISM reported that the services PMI rose from 48.8 in June to 51.4 in July, which was higher than the forecast of 51.0. The services sector returned to expansion, reducing some of the fears of a recession. Additionally, rate cut expectations eased slightly. Markets are now pricing in a 75% chance of a 50-bps Fed rate cut in September. 

Nevertheless, rate-cut expectations will remain high if inflation continues easing and the economy slows. This will weigh on the dollar and keep the yen strong. At the same time, if the BoJ continues tightening monetary policy, the outlook for USD/JPY will remain bleak.

USD/JPY key events today

There won’t be any major releases from the US or Japan. Therefore, the pair might consolidate. 

USD/JPY technical outlook: Bulls resurface as downtrend pauses

On the technical side, the USD/JPY price has pulled back to retest the 145.05 key level. Although the downtrend has paused, the bearish bias remains strong. The price trades below the 30-SMA, and the RSI is below 50. 

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Therefore, if the pullback continues, the price might retest the 30-SMA resistance before making new lows. However, if bears are ready, they might return at the 145.05 level, to push the price to the next support at 140.00. A lower low will confirm the continuation of the downtrend.

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• The first thing I notice is that the 0.86 level has offered a significant amount of resistance after slamming directly into it.
• The market continues to shoot straight up in the air as traders are running toward the euro and away from the British pound.

We are well above the 50 day EMA, as well as the 200 day EMA indicators. This means that a lot of technical traders will look at this as a market that has completely changed its overall trajectory.

Longer-term Analysis

The real question is whether or not the 0.84 level ended up being the absolute “floor in the market.” I think that will end up being the case eventually, because quite frankly we have shot straight up in the air, and when you look at the monthly chart, it’s an area that has been crucially important more than once. Short-term pullbacks should be thought of as a potential buying opportunity, with the 200-Day EMA perhaps offering a bit of support near the 0.8540 level. Underneath there, we have the 0.85 level also offering support. As long as we can stay above the 0.85 level, I suspect that the British pound will continue to suffer at the hands of the euro strength (EUR/GBP currency pair).

A lot of what we are seeing comes down to the Federal Reserve and the fact that they may start aggressively cutting rates. If that’s going to be the case, then it makes a lot of sense that we would continue to see the euro do fairly well, because it is considered to be the “anti-dollar.” In that environment, you do get a significant amount of “knock on effect” in this pair, as well the other euro related once. In general, this is a pair that is typically very choppy and noisy, so the fact that we have had 3 very impulsive days to the upside will not go unnoticed by traders around the world. At this point, I think the buyers are definitely starting to flex their muscles.

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• GBP/USD stays under bearish pressure after posting losses on Monday.
• The pair could extend its downtrend if 1.2700 support fails.
• The US economic calendar will not feature any high-impact data releases on Tuesday.

GBP/USD failed to benefit from the broad-based selling pressure surrounding the US Dollar (USD) on Monday and closed the day in negative territory. The pair stays on the back foot early Tuesday and declines toward 1.2700.

Escalating geopolitical tensions triggered an intense flight to safety at the beginning of the week. The broad market selloff weighed heavily on the USD but the risk-sensitive Pound Sterling failed to find demand in the risk-averse market environment. 

Although there are no fresh developments that point to a de-escalation of the conflict in the Middle East, investors seem to be breathing a sigh of relief for now. At the time of press, US stock index futures were up between 0.4% and 0.8%, while the UK’s FTSE 100 Index was trading flat. It’s worth noting that US stock index futures were up more than 1% earlier in the session, suggesting that risk flows are losing steam already.

The economic calendar will not offer any high-tier data releases that could impact the USD’s valuation in a meaningful way. Hence, market participants will pay close attention to changes in risk perception.

GBP/USD Technical Analysis

GBP/USD was last seen trading near the 1.2710-1.2700 support area, where the Fibonacci 78.6% retracement of the latest uptrend and a psychological level align. In case that region turns into resistance, additional losses toward 1.2620 (static level, beginning point of the uptrend) and 1.2600 (psychological level, static level) could be seen.

On the upside, resistances could be seen at 1.2780 (Fibonacci 61.8% retracement, descending trend line), 1.2810 (200-period Simple Moving Average) and 1.2830 (Fibonacci 50% retracement).

 

• The US dollar has plunged against the Japanese yen in trading on Monday as we have now breached the 143 yen level, but it is worth noting that we are at least attempting to recover a bit.
• At this point in time though, I do not trust any bounce as this market has been so crucially beaten.
• That being said, the market is likely to continue to see a lot of a fade the rally type of attitude, and that of course is the major factor in this market.

Support Areas

There is an area right around the 142 yen level and the 141 yen level that offers significant support. We have just broken through a major trend line and therefore it’s likely that we will continue to see a lot of noise in general. Keep in mind that this is about the carry trade unwinding where people had borrowed in Japanese Yen to buy AI stocks and at this point it looks like that trade is all but over.

The interest rate differential still favors the US dollar but quite frankly at this point everybody is so worried about whether or not the Federal Reserve will cut that it is working against the greenback in general if we can turn around and break above the 147.50 yen level then the market could make a move towards the 150 yen level if we break down below the 140 yen level that would be extraordinarily negative and that could send this market much lower at that point the bottom will have fallen out

Quite frankly, we are on the precipice of something big and you’re better served simply standing on the sidelines instead of trying to become a hero or worse yet, getting wiped out. Being patient will protect your account and perhaps keep you in the game period I have seen moves like this wipe out traders and completely remove them from trading forever. Caution is advised.

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Carry trades, popular in the FX space. involve borrowing in a low-interest-rate environment to invest in a higher-interest-rate environment. For the USD/JPY, carry trades involve being long on the US dollar or short on the Yen. USD/JPY movements are exaggerated as investors use leverage to boost returns.

The USD/JPY fell from a July 31 high of 153.889 to an August 5 low of 141.684 due to carry trade unwinding.

Equity and crypto market moves following the BoJ policy decision also reflected the effects of unwinding carry trades.

Is the Yen carry trade unwind close to an end?

Multiple 2024 Fed rate cuts and a US economic recession could narrow interest rate differentials further, weakening the USD/JPY and delivering more pain to the markets.

Brookings Institution Senior Fellow Robin Brooks commented on the Yen carry trade, stating,

“Price action since Friday offers a good lens on where the Yen carry trade is concentrated. EM currencies that have been most hit are the Mexican Peso and Colombian Peso, both of which have been known to harbor lots of carry trades. South Africa and Turkey are also getting hit…”

US Economic Calendar

Later in the Tuesday session, the RCM/TIPP Economic Optimism Index needs consideration.

Economists expect the Index to rise from 44.2 in July to 45.0 in August, potentially influencing the USD/JPY pairing amid US recession fears.

The Index reflects consumer views on the US economy, personal finances, inflation, and the labor market. A higher-than-expected Index would suggest increasing consumer spending, easing concerns about the economic outlook as it contributes over 60% to GDP.

Moreover, higher spending trends could fuel demand-driven inflation, reducing the need for multiple 2024 Fed rate cuts. A less dovish Fed rate path may support a USD/JPY move toward 150.

Expert Views

Bloomberg Chief Markets Editor David Ingles said,

“Govt bonds as a group up 8 straight days, longest streak in 4 years. Growth outlook souring, rate cuts starting to come out of the kitchen. Swaps signal 3 Fed cuts now fully priced this year. Eerily enough, last time we had an 8-day streak was when pandemic lockdowns pummeled the global economy.”

Short-term Forecast: Bearish

USD/JPY trends will hinge on household spending and wage growth numbers from Japan. Upbeat numbers could raise investor bets on a Q4 2024 BoJ rate hike and a USD/JPY fall below 140.

Investors should remain alert. Monitor real-time data, central bank monetary policy decisions, 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 sat well below the 50-day and 200-day EMAs, confirming the bearish price trends.

A USD/JPY return to 145 would support a move toward 150. Furthermore, a breakout from 150 could bring the 151.685 resistance level into view.

Japan’s household spending and the RCM/TIPP Economic Optimism Index require consideration on Tuesday.

Conversely, a drop below the 143.495 support level could signal a fall to the 141.032 support level. A break below the 141.032 support could bring sub-140 into play.

The 14-day RSI at 13.96 shows the USD/JPY in oversold territory. Buying pressure may increase at the 143.495 support level.

• EUR/USD briefly pierced the key 1.1000 barrier on Monday.
• The Dollar melted as markets priced in an inter-meeting Fed rate cut.
• Concerns over a hard landing in the US spooked investors.

EUR/USD added to Friday’s robust comeback and briefly trespassed the psychological 1.1000 hurdle in quite a positive start to the new trading week.

The strong move higher in spot followed an equally deep retracement in the US Dollar (USD), which sent the US Dollar (USD) to levels last seen in January near the 102.00 neighbourhood.

Meanwhile, investors continued to gauge last week’s discouraging prints from the US docket vs. the likelihood that the US economy might tip into recession this year, all requiring a probable inter-meeting rate cut by the Fed as well as more interest rate reductions.

Meanwhile, stocks around the world plummeted on (exaggerated?) fears that the world’s top economy could lose traction to the point of entering recession.

Looking at the money markets, US yields rebounded on the short end of the curve while trimming some losses in the belly and the long term. In Germany, 10-year bund yields bounced off fresh lows near 2.10%.

Back to the Fed, Austan Goolsbee, President of the Chicago Fed Bank, argued on Monday that Fed rate setters must closely watch changes in the US economy to avoid being overly restrictive with interest rates. He observed that, despite weaker-than-expected employment growth, there are currently no indicators of a recession. Goolsbee also warned against overinterpreting the global stock market sell-off.

The policy divergence between the Fed and the ECB could shrink in the event of more and deeper rate cuts by the Fed. However, fresh weakness in US fundamentals has flagged risks to the view of a soft landing, mirroring a loss of momentum in the Eurozone’s recovery. This opens the door to a potentially weaker Dollar in the near term and extra gains in EUR/USD.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD’s first obstacle is the August high of 1.1008 (August 5), followed by the December 2023 top of 1.1139 (December 28).

On the downside, the next target for the pair is the 200-day SMA at 1.0827 prior to the weekly low of 1.0777 (August 1) and the June low of 1.0666 (June 26), all preceding the May low of 1.0649 (May 1).

Looking at the larger picture, the pair’s constructive bias should hold if it climbs above the critical 200-day SMA in a convincing fashion.

So far, the four-hour chart suggests renewed bullish momentum. Against it, the initial resistance is at 1.1008, ahead of 1.1139. On the flip side, initial support aligns at 1.0777, seconded by 1.0709. The relative strength index (RSI) eased to about 68.

GBP/USD Forecast: Bulls struggle to take control despite broad USD weakness

GBP/USD closed in positive territory on Friday but failed to build preserve its recovery momentum at the beginning of the week. At the time of press, the pair was trading in the red slightly above 1.2750.

The selling pressure surrounding the US Dollar (USD) helped GBP/USD erase a portion of its weekly losses in the American session on Friday. The US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls rose 114,000 in July. This reading missed the market expectation for an increase of 175,000 by a wide margin. Read more…

GBP/USD Weekly Forecast: Pound Sterling sellers look to retain control

Recording a third consecutive weekly decline, the Pound Sterling (GBP) reached its lowest level in a month against the US Dollar (USD), leaving GBP/USD to battle the 1.2700 threshold.

GBP/USD remained at the losing end, despite the persistent divergent monetary policy outlooks between the US Federal Reserve (Fed) and the Bank of England (BoE), as the pair witnessed more of a risk trade rather than a rate trade. Read more…

EUR/USD Current price: 1.0985

• United States Treasury yields collapsed amid speculation of an out-of-schedule rate cut.
• Mounting tensions in the Middle East fueled risk-aversion and further hurt the US Dollar.
• EUR/USD tests the 1.1000 mark, more gains likely despite extremely overbought conditions.

The EUR/USD pair trades at fresh multi-month highs near the 1.1000 mark in a chaotic start to the week. Concerns about the state of the United States (US) economy hit hard the US Dollar as market players increased bets on an out-of-schedule rate cut from the Federal Reserve (Fed) as soon as next week. It seems a bit overstretched, but as expected last week, financial markets are all about sentiment and will likely remain so in the upcoming days.

Adding fuel to the fire, weekend news showed increased tensions in the Middle East. Israel responded to the latest Hamas attack and air-striked Gaza, killing at least 30 people, while Hamas’s political leader, Ismail Haniyeh, was killed in Tehran. Fears of an escalating war in the region as Iran vowed retaliation further fueled the dismal mood.

The US Dollar trades mixed, under strong selling pressure against European rivals and safe-haven currencies, but firmer against Gold amid plummeting Treasury yields, with the 10-year note offering as low as 3.67% ahead of Wall Street’s opening, a fresh 52-week low. Yields on the 2-year note also plummeted and practically match the 10-year ones.

Data-wise, the Hamburg Commercial Bank (HBOC) published the final estimates of the July PMIs for the Eurozone, with the EU Composite PMI upwardly revised to 50.2, slightly better than the previous 50.1. Additionally, the Producer Price Index (PPI) fell 3.2% YoY in June, while it rose 0.5% MoM. The readings were higher than expected but far from concerning.

The American session will bring the final July US S&P Global Services PMI and the official ISM report on non-manufacturing output.

EUR/USD short-term technical outlook

The EUR/USD pair is sharply up for a second consecutive day and poised to extend its advance. In the daily chart, the pair has run beyond all its moving averages, while the 20 Simple Moving Average (SMA) gains upward momentum above the longer ones, yet over 100 pips below the current level. Technical indicators, in the meantime, head north within positive levels, far from reaching overbought readings and without signs of upward exhaustion.

In the near term, and according to the 4-hour chart, the bullish momentum remains strong despite technical indicators standing at extreme overbought levels. At the same time, the 20 SMA heads firmly north above the 200 SMA, although still below a pretty much flat 100 SMA. Overall, EUR/USD seems poised to storm through the 1.1000 figure in the upcoming sessions.

Support levels: 1.0960 1.0915 1.0875

Resistance levels: 1.1005 1.1040 1.1085