• The Japanese yen fell to around 161 yen per US dollar, breaking through this level for the first time since 1986, as the Ministry of Finance appointed Atsushi Mimura as Japan’s top currency diplomat, replacing Masato Kanda.
• The appointment comes as the sharp decline in the value of the Japanese yen has put continued pressure on Japanese authorities to defend their currency, but they have so far appeared to have declined to intervene in foreign exchange markets after doing so in late April.

Earlier in the week, Finance Minister Shunichi Suzuki warned that sudden unilateral moves in the yen are undesirable and that authorities will take appropriate action if necessary.

According to Forex trading, the Japanese yen has lost more than 2% against the US dollar so far in June, continuing its year-to-date decline to around 14% as the Bank of Japan took a more dovish approach to normalizing monetary policy than markets had expected. Meanwhile, Japanese retail sales and industrial production data came in stronger than expected in May, while inflation in Tokyo accelerated in June.

On the economic calendar front, the US headline inflation reading is helping advocates of a September interest rate cut. The Federal Reserve could consider cutting US interest rates in September, according to analysts reacting to the headline inflation reading that fell to a three-year low. According to an official announcement, the US core personal consumption expenditures index rose by just 0.083% on a monthly basis in May, the BLS said, down from an upwardly revised 0.3% in April. Moreover, the figure was in line with consensus (0.1%) and helped push the annual rate down to 2.6% from 2.8%, the lowest in three years.

Because the figure was in line with expectations, there was little reaction in bond and currency markets. However, the data will help build the case for a Federal Reserve rate cut in September, some analysts say.

The PCE is a measure of inflation that is particularly important to consumers and is therefore closely watched by the Fed. “Fed officials, who are responsible for managing inflation, prioritize the PCE over the CPI when setting the effective federal funds rate,” says Nigel Green, CEO of DeVere Group.

Further refinement of the figures shows the “super” measure — basic services excluding housing rents — slowing to 0.1% on a monthly basis, the slowest since August. Also, the data set includes figures showing consumption slowing due to higher interest rates. Real consumption rose 0.3% month-on-month in May, and second-quarter consumption growth now trails at just 1.6%.

Capital Economics estimates GDP growth has now slowed to 1.8% in the second quarter, “capping off a weak first half of the year. Like Biden, consumers appear to be stumbling at the wrong time, finally succumbing to the pressure of higher interest rates.” Added, “That’s exactly what the Fed wants to see, and I think it’s clear now when you look at the data broadly that the inflation trajectory is firmly down. However, for a September cut, we’re really going to need to see a little bit more.”

Meanwhile, Kyle Chapman, FX analyst at Ballinger Group says: “This is the kind of number that’s going to be repeated over the next two or three prints to convince the Fed that 2% is within their reach,”.

However, Green of DeVere Group says the Fed will want to see more months of positive data before cutting rates. “Our previous forecast that the Fed will not cut rates until 2025 now appears to be gaining traction among a growing number of policymakers as well.”

“We are still not at the point where it is appropriate to cut rates,” Fed policymaker Michelle Bowman said last week. “Given the risks and uncertainties surrounding my economic outlook, I will remain cautious in my approach to considering future changes in the policy stance.” Also, she revealed that she is one of several Fed policymakers who do not see any cuts this year, making her one of four Fed policymakers who believe US interest rates will remain unchanged.

USD/JPY Technical analysis and Expectations Today

Last Thursday’s rally pushed the USD/JPY pair just above its 100-hour moving average. However, the pair still appears to have plenty of room to run before reaching overbought conditions on the 14-hour RSI. In the near term, based on the hourly chart, the USD/JPY pair is trading within an ascending channel formation. However, the 14-hour RSI still has room to run before reaching overbought conditions. Therefore, bulls will look to extend the current rally towards 161.29 or higher to the 161.88 resistance.

On the other hand, bears will look to pounce on pullbacks around 160.24 or lower at the 159.62 support. In the long term, based on the daily chart, USD/JPY continues to trade within an ascending channel. Also, the 14-day RSI appears to support a long-term bullish bias after entering overbought conditions. Therefore, bulls will target long-term gains around 162.57 or higher at the 164.39 resistance. On the other hand, bears will look to pounce on pullbacks around 158.85 or lower at 156.91.

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STORY LINK Euro to Pound Rate Rallies after French Election First Round, GBP/EUR 3-Week Lows

The Pound to Euro (GBP/EUR) exchange rate retreated to 3-Week lows around 1.1775 after the French election results.

There was some relief on expectations that the National Rally (RN) would fall short of a majority in next week’s second round, although still with a high degree of uncertainty.

ING commented; “the case for a materially stronger EUR/GBP within the next couple of weeks is not very compelling. (Solid support for GBP/EUR). Key support remains at 1.1765.

In the first round of French elections, RN won around 33% of the vote followed by 28% for the left-wing alliance (NPF) with President Macron’s centrist party in third place.

Attention will now focus on the second round on Sunday with the position complicated by a substantial number of three-way contests.

There will be calls for candidates to drop out to block the RN from winning seats.

Opinion polls suggest that the RN will fall short of an overall majority in parliament.

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According to Bank of America; “We expect some EUR recovery in a “hung parliament” scenario. Commonwealth Bank of Australia (CBA) strategist Carol Kong commented; “They (RN) have actually performed a little bit worse than what was expected,”

She added; “As a result of that, we saw the euro rise modestly in early Asian trade just because we might actually get less fears of more expansionary and unsustainable fiscal policy if the far-right party did a little bit worse.”

Fiona Cincotta, senior markets analyst at City Index took a similar view; “Le Pen had a slightly smaller margin than some of the polls had pointed to, which may have helped the euro a little bit higher on the open.”

There had also been some talk that the NPF would do better than expected.

There are still underlying concerns over the underlying outlook.

ING commented; “Still, first round results are not offering much certainty about the composition of the parliament, and the second round scheduled for the next weekend is in fact the big risk event.

It added that bond markets will be important; “We’ll be monitoring closely the performance of OAT versus the bund today. There is a chance of some tightening in the spread which can help the euro, but our rates team continues to view structurally wider spreads beyond the short term and we doubt the euro will be able to entirely erase political risk premium this summer.”

As far as the UK General election is concerned, Labour remains dominant in opinion polls.

According to ING; “There has, indeed, been very little doubt about a Labour landslide win, so the election should not be a huge event for markets. We suspect that a stronger than expected result by populist/hard-Brexiteer Reform UK is the most tangible risk for some slight adverse reacting in GBP assets.”

There has been no significant shift in polls, although with some indication that support for the Reform Party has peaked which could ease political risk slightly.

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• GBP/USD gains traction at the beginning of the week.
• The pair could have a hard time clearing 1.2700-1.2710 resistance.
• The US economic calendar will feature the ISM Manufacturing PMI data for June.

GBP/USD holds its ground early Monday after closing the previous week virtually unchanged. The technical outlook points to a bullish tilt in the short term.

The selling pressure surrounding the US Dollar (USD) at the beginning of the week helps GBP/USD edge higher. On Friday, the data from the US showed that the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred gauge of inflation, rose 2.6% on a yearly basis in May. On a monthly basis, the PCE Price Index remained unchanged. These figures came in line with analysts’ estimates and made it difficult for the USD to stay resilient against its rivals.

The US economic docket will feature the ISM Manufacturing PMI data for June later in the day. Investors expect the headline PMI to rise slightly to 49 from 48.7 in May. A reading above 50, which would point to an expansion in the manufacturing sector’s business activity, could help the USD find demand.

In case the PMI data comes near the market expectation, investors are likely to pay close attention to inflation and employment components. A sharp decline in the Prices Paid Index could weigh on the USD.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart rose to 60, reflecting a buildup of bullish momentum. On the upside, 1.2700-1.2710 (100-period Simple Moving Average (SMA) on the 4-hour chart, 200-period SMA) aligns as first resistance before 1.2760 (static level) and 1.2800 (psychological level, static level).

On the downside, the 50-period SMA aligns as interim support at 1.2665 before 1.2640 (100-day SMA) and 1.2600 (psychological level, static level).

• GBP/USD gains traction at the beginning of the week.
• The pair could have a hard time clearing 1.2700-1.2710 resistance.
• The US economic calendar will feature the ISM Manufacturing PMI data for June.

GBP/USD holds its ground early Monday after closing the previous week virtually unchanged. The technical outlook points to a bullish tilt in the short term.

The selling pressure surrounding the US Dollar (USD) at the beginning of the week helps GBP/USD edge higher. On Friday, the data from the US showed that the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred gauge of inflation, rose 2.6% on a yearly basis in May. On a monthly basis, the PCE Price Index remained unchanged. These figures came in line with analysts’ estimates and made it difficult for the USD to stay resilient against its rivals.

The US economic docket will feature the ISM Manufacturing PMI data for June later in the day. Investors expect the headline PMI to rise slightly to 49 from 48.7 in May. A reading above 50, which would point to an expansion in the manufacturing sector’s business activity, could help the USD find demand.

In case the PMI data comes near the market expectation, investors are likely to pay close attention to inflation and employment components. A sharp decline in the Prices Paid Index could weigh on the USD.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart rose to 60, reflecting a buildup of bullish momentum. On the upside, 1.2700-1.2710 (100-period Simple Moving Average (SMA) on the 4-hour chart, 200-period SMA) aligns as first resistance before 1.2760 (static level) and 1.2800 (psychological level, static level).

On the downside, the 50-period SMA aligns as interim support at 1.2665 before 1.2640 (100-day SMA) and 1.2600 (psychological level, static level).

• Elections in France put the far-right National Rally party in first position.

• ECB policymakers remain confident that inflation will reach the target.

• The US core PCE price index eased from the previous month.

The EUR/USD forecast leans bullish as the euro rises after round one of the French elections. Meanwhile, the dollar was on the back foot after inflation data in the previous session raised bets for a Fed cut in September.

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On Sunday, elections in France put the far-right National Rally party in first position. However, the win was by a smaller margin than expected, supporting the euro. If the far right performs poorly, there will be less fear of a financial crisis. The euro has fallen in recent sessions since Macron announced a snap election that created a cloud of political uncertainty.  However, after the election, the EUR/USD pair reached a two-week high before pulling back. 

Elsewhere, ECB policymakers remain confident that inflation will reach the central bank’s target. Consequently, the central bank will likely continue cutting interest rates. Meanwhile, the Fed is yet to start its cutting cycle.

The dollar was weak after data on Friday showed weaker inflation in May. The US core PCE price index met expectations at 2.6%, easing from the previous month. This gave investors more confidence that the Fed will cut in September. However, policymakers might continue watching incoming data for more evidence that the decline to 2% will continue. 

Currently, markets are pricing a 63% chance that the Fed will start lowering borrowing costs in September. This might change this week after the US nonfarm payrolls report, which is due on Friday.

EUR/USD key events today

• German Prelim CPI m/m
• US ISM Manufacturing PMI

EUR/USD technical forecast: Bulls break range above 1.0750

On the technical side, the EUR/USD price has gapped up and broken above the 1.0750 resistance level. Moreover, the price has broken out of its consolidation area between the 1.0675 support and the 1.0750 resistance.

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The previous bearish move showed weakness when the price punctured the 30-SMA resistance. At the same time, the RSI made a bullish divergence, showing fading bearish momentum. 

Afterwards, the price entered an area of consolidation, where bulls and bears fought for control. Bulls won when the price gapped up, showing massive bullish momentum, before breaking above 1.0750. Bulls might now target the 1.0850 resistance level.

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• In today’s GBP/JPY analysis we continue to see a lot of bullish pressure on each dip, and I think that it is only a matter of time before buyers come in and pick this market up.
• All things being equal, the interest rate differential enough is reason to own this market.
• After all, most institutional traders tend to look at these pairs as investments, not “smash and grab” trades like retail traders do.

Swap Matters

As we get paid at the end of every day to hang on to it. If we pull back from here, the ¥200 level, of course, is an area that a lot of people will be paying attention to unless it was previous resistance and now based on market memory should be supported. The 50 day EMA is racing towards the ¥200 level as well, so that all comes together to offer a significant opportunity if we do get down there.

On the other hand, we could just continue to go higher. That would make a certain amount of sense as well. But we are overbought at this point. You do have to be cautious with this type of stretched out GBP/JPY market. With that being said, I like the idea of buying short term dips as a value proposition. I don’t have any interest in shorting this market.

I certainly wouldn’t want to pay the swap at the end of every day for that. privilege. So really, at this point, I don’t see much keeping this pair from going to the ¥205 level, other than we might be a little stretch, but I think any pullback gets bought into rather quickly. That gives you an opportunity to chase what is obviously a very strong upside. That swap at the end of every day cannot be overstated. I think continues to be one of the main drivers of where we go next.

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According to the preliminary survey, the S&P Global Manufacturing PMI increased from 51.3 to 51.7.

While the stats may have a limited impact on the USD/JPY, FOMC Member speeches could move the dial.

Consideration Needed for Reactions to the US Personal Income and Outlays Report

Beyond the numbers, investors should monitor FOMC Member chatter. Reactions to the US Personal Income and Outlays Report could influence investor expectations of a September Fed rate cut.

In particular, investors should consider views on inflation and the timing of a Fed rate cut.

Short-term Forecast: Bearish

USD/JPY trends depend on intervention threats, consumer confidence numbers from Japan, and central bank speeches. Better-than-expected consumer confidence figures could raise investor bets on a BoJ rate hike and support a USD/JPY drop below 160. However, an intervention could send the USD/JPY through the 152 handle.

USD/JPY Price Action

Daily Chart

The USD/JPY sat well above the 50-day and 200-day EMAs, confirming the bullish price signals.

A USD/JPY breakout from the June 28 high of 161.283 would support a move toward the 162 handle.

Intervention threats, Bank of Japan commentary, consumer confidence numbers from Japan, and Fed speakers require investor attention.

Conversely, a fall through the 160 handle could signal a USD/JPY break below the 50-day EMA. A drop below the 50-day EMA could give the bears a run at the $151.685 support level.

The 14-day RSI at 72.85 shows a USD/JPY in overbought territory. Selling pressure may increase at the June 28 high of 161.283.

Potential BoJ Monetary Policy Actions

Beyond the numbers, investors should monitor intervention threats and BoJ commentary. Concerns about the effect of a weak Yen on the Japanese economy could influence the government and the BoJ. Intervention or BoJ support for a July interest rate hike and aggressive cuts to Japanese Government Bonds could potentially push the USD/JPY towards 150.

Expert Opinions on BoJ Strategies

Last week, Finance Minister Shunichi Suzuki also talked about an intervention, saying,

“We would respond appropriately to excessive currency moves.”

However, Bruegel Senior Fellow Alicia Garcia Herrero believed monetary policy tools could be more effective, saying,

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

Given these dynamics, investors should be mindful of potential downside risks for the USD/JPY. While economic indicators from Japan could send mixed signals, moves to bolster the Yen could materially impact the USD/JPY pairing.

Beyond the Japanese economic calendar, economic data from the US may also influence monetary policy intentions for the BoJ and the Fed.

Overview of the US Dollar Outlook

Meanwhile, it will be another pivotal week for the US dollar amidst ongoing speculation about a September Fed rate cut.

ISM Manufacturing PMI Expectations

On Monday, ISM Manufacturing PMI figures will garner investor interest. While accounting for less than 30% of the US economy, the numbers may influence investor expectations of a soft US economic landing.

Economists forecast the ISM Manufacturing PMI to increase from 48.7 to 49.0 in June. The PMI will unlikely influence sentiment toward the Fed rate path despite the likely interest. The services sector remains the focal point vis-à-vis the US economy and inflation trends.

Job Openings and Quits Data

However, JOLTs job openings and job quits could influence investor expectations of a September rate cut.

Economists forecast job openings to fall from 8.059 million in April to 7.850 million in May. Additionally, economists expect job quits to decline from 3.507 million to 3.500 million.

A sharp fall in job openings and quits could signal a weakening US labor market. Weaker labor market conditions might impact wage growth and reduce disposable income. Downward trends in disposable income could curb consumer spending and dampen demand-driven inflation.

On Wednesday, the US labor market will be in focus again alongside the all-important services sector.

ADP Employment Report and Jobless Claims

Economists predict the ADP to report a 170k increase in employment in June after a 152k rise in May.

Additionally, economists forecast initial jobless claims to increase from 233k to 235k in the week ending June 29.

A less marked increase in the ADP numbers and a sharper rise in jobless claims could fuel speculation about a September rate cut.

Importance of ISM Services PMI and Sub-components

However, investors should consider the ISM Services PMI and its sub-components. The services sector accounts for over 70% of the US economy and remains a driving force behind inflation.

Economists forecast the ISM Services PMI to fall from 53.8 to 52.5 in June. Furthermore, economists expect the ISM Services Prices Index to drop from 58.1 to 57.8.

Slower service sector activity and softer input price pressures would support investor expectations of a September rate cut.

Will the US Jobs Report Solidify Expectations of a September Fed Rate Cut?

Friday could be a critical day for the US dollar, with the crucial US Jobs Report in the spotlight.

Weaker wage growth, an unexpected rise in the US unemployment rate, and a less marked-than-expected rise in nonfarm payrolls could sink the USD/JPY. Forecasts are as follows:

• Average hourly earnings to increase 3.6% year-on-year in June after rising 4.1% in May.
• Nonfarm payrolls to rise by 180k (May: +272k).
• US unemployment rate: 4% (May: 4%).

Last week, Arch Capital Global Chief Economist Parker Ross reacted to recent US jobless claims trends, stating:

“Continuing claims of 1,839k (sa) surprised more meaningfully to the upside for the week ending June 15 (1,828k cons) but was just above my estimate of 1,835k. […]. Continuing claims still reflect a more substantial softening of the labor market.”

The jobless claims data for the week ending June 22 suggested a higher unemployment rate.

STORY LINK Euro to Dollar Outlook Scenarios: French Election 2024

The Euro to Dollar exchange rate (EUR/USD) touched seven-week lows at 1.0660 during the week before creeping back above 1.07.

The near-term focus will be on the French parliamentary elections with opinion polls suggesting that President Macron’s centrist party is running behind the right-wing National Rally (RN) and left-wing alliance (NPF).

MUFG notes the risk that the Euro to Dollar (EUR/USD) exchange rate could weaken to 1.05 if President Macron suffers heavy losses in the French parliamentary elections.

Danske Bank forecasts EUR/USD at 1.03 in 12 months with Wells Fargo expecting a very slow recovery to 1.11 at the end of 2025.

ING looked at the implications of an RN victory; “The question for the market is whether a Le Pen government looks at the French bond market and starts dropping some of its plans for seemingly unfunded tax cuts – or pushes ahead.”

It added; “Our eurozone team suspects it will be too early for a new government to substantially water down its pre-election pledges and that it may well be a rocky few months into September.

According to MUFG; “Obviously if RN and NPF were to do worse than expected at the expense of Macron’s Ensemble or Les Republicans, we will likely see some spread narrowing on Monday and some modest EUR gains. With the EUR risk premium relatively modest strong RN & NPF performances will likely see EUR/USD close to the 1.0500-level.”

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There were no major US economic developments during the week with the evidence still pointing to a slightly softer labour market. There also no shift in Federal Reserve rhetoric with Governor Bowman, for example, starting that it was still too early to cut inflation rates given on-going inflation concerns.

Markets continued to price in around a 65% chance of rates being cut at the September meeting.

Wells Fargo looks at near-term yield trends and commented; “For now, we continue to see U.S. dollar strength into Q3-2024 as the Fed delays easing until September, while central banks such as the ECB, Bank of Canada and Bank of England cut interest rates earlier than the FOMC.”

The bank still expects a reversal from later in 2024.

According to Wells Fargo; “longer term, we continue to believe the greenback can weaken starting in Q4 of this year, and for dollar depreciation to persist over the course of 2025. In our view, the combination of the Fed cutting interest rates and slower U.S. economic growth should place depreciation pressures on the U.S. dollar for an extended period of time.

The wider global environment will also be important and it added; “As G10 growth converges toward the U.S., and the U.S. exceptionalism theme fades, we believe sentiment toward foreign currencies can ultimately be supported. In addition, an FOMC that is lowering interest rates should also lead to easier global financial conditions.”

US political developments will also be important with this week’s TV debate between President Biden and former President Trump triggering a fresh round of uncertainty and speculation amid a consensus that Biden performed poorly.

ING commented; “Our baseline assumption is that Trump is the most dollar-positive candidate due to protectionism pledges, geopolitical stance and plans for lower taxes, but markets have not had a real chance to trade on the back of US political news as monetary policy dominated.”

There were no major Euro-Zone economic developments during the week, but weaker-than-expected German business confidence data reinforced market reservations over the outlook.

As far as ECB policy is concerned markets expect gradual rate cuts.

According to HSBC; “Our central case remains that we then see 25bp every other meeting until the key deposit rate reaches 2.5% in September 2024, which should put it close to neutral. However, the stickiness of services inflation means the risks are now tilted towards a slower pace of easing.”

Danske Bank still sees scope for Euro losses; “We believe that fundamental factors indicate a lower EUR/USD in the medium term. In the near term, we expect the cross to continue trading within a range, but we slightly favour the downside due to the EUR leg potentially remaining fragile owing to the political risk premium.”

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GBP/JPY Forecast Video for 18.08.23

British Pound vs Japanese Yen Technical Analysis

This upward push, especially after multiple tries, highlights the growing preference among traders for a “buy on the dips” strategy. This approach anticipates momentary downturns, aligning with the currency’s likely continued ascent. As a result, many are steering clear of shorting this pair. Significantly, the 50-Day Exponential Moving Average, situated around ¥180, stands as a testament to the bullish momentum’s strength.

A look at the trading chart hints at a forthcoming move towards the ¥190 level, yet it’s crucial to recognize the challenges of such a trek. On an extended horizon, aiming for the ¥200 level seems like a viable long-term ambition. While this jump might seem ambitious, the interest rate difference between the UK and Japan plays a pivotal role in driving up the pound’s value. Given this backdrop, the upward momentum looks set to persist, encouraging traders to hold onto their positions. This dynamic, especially the attractive financing rates, isn’t something large financial institutions will miss out on.

Temporary downturns should be expected. These offer avenues for traders to identify and capitalize on market value, especially given the bullish streak observed in recent weeks. The breakthrough beyond the significant ¥185 resistance—now likely a support level—might come with some market noise. It seems almost inevitable, though, that the pound is set to soar even higher in time. The market pulling back in this environment will more likely than not be short term opportunities that should be taken advantage of. I have no interest in shorting this pair for the foreseeable future.

To wrap up, the British pound’s recent performance paints a picture of bullish momentum intertwined with tactical support thresholds. The push beyond ¥185 is a pivotal move, echoing the prevailing “buy on the dips” sentiment among the trading community. The envisioned short-lived downturns only cement this viewpoint further. While the road to ¥190 and potentially further looks promising, the pound’s appeal largely hinges on the nuances of interest rate disparities. As the market wades through periodic downturns, the scene offers a plethora of opportunities to capitalize on the dominant bullish trend. Amid these dynamics, a keen focus on pivotal markers, like the ¥185 level, will guide traders in this ever-evolving market landscape.

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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