• 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

More From FXEMPIRE:

• The euro has initially rallied a bit during the trading session on Tuesday, but it’s worth noting that we are getting dangerously close to a major swing high at the 1.11 level, and in fact have already pulled back just a bit.
• Furthermore, the relative strength index is now in the overbought condition.
• So, it’ll be interesting to see if we can continue to see this pair just go straight up in the air.

A Pullback Imminent?

I have a sneaking suspicion that we are in fact due for a bit of a pullback and we’ll in fact see that happen sooner rather than later. This is not to say that we are going to see a major breakdown, just that momentum is a bit of a fickle thing and sooner or later traders will be looking to take some profit.

We have the Jackson Hole Symposium going on this week and that of course will have a major influence on what’s going on with the currencies around the world. And the markets will be paying attention to not only speeches by central bank governors, but for example, during Wednesday’s session, the FOMC meeting minutes come into the picture, and then we get PMI numbers on Thursday from various countries. So, there is probably a certain amount profit-taking going on during the session. And this of course leads to a healthy market. You can’t go in one direction forever. If we do get a pullback, the 1.10 level should be support. If we could continue to go higher, then the 1.1150 level would be the next target, followed by the 1.1250 level after that.

The one thing you can probably count on is that it is going to be very noisy and choppy, and with that being said, the market is likely to continue to focus on the Federal Reserve more than anything else, because it’s all about trying to get “Uncle Jerome” jumping into the market to save us all via liquidity.

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• The UK flash composite PMI which revealed an increase from 52.8 to 53.4 in August.

• The pound has gained 2% in August as the dollar weakened.

• Markets are awaiting Powell’s speech later in the day.

The GBP/USD price analysis shows a solid bullish trend as the pound rallies to new highs after positive UK business activity data. At the same time, the dollar was frail as investors gained confidence in a September Fed cut ahead of Powell’s speech.

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On Thursday, the S&P 500 released UK flash composite PMI which revealed an increase from 52.8 to 53.4 in August. Meanwhile, economists had expected a smaller increase to 52.9. The surge in business activity was bullish for the pound, as it indicated a resilient economy, lowering BoE rate cut expectations. 

The pound has gained 2% in August as the dollar weakened. Recent US data has raised the likelihood that the Fed will cut rates in September. Inflation is consistently easing towards the 2% target. At the same time, the labor market has shown cracks, putting more pressure on the Fed. 

US central bank policymakers came out on Thursday, supporting a September rate cut. This was a clear shift from their previous cautious tone. With one more inflation report to go, the risk of a major shift in the rate-cut outlook has reduced. 

Meanwhile, markets are awaiting Powell’s speech later in the day. Experts believe he will echo what other policymakers have said so far. However, investors will focus on his message regarding the size and pace of future rate cuts. A more dovish outlook beyond September might weaken the dollar further, lifting sterling. 

GBP/USD key events today

• Fed Chair Powell Speaks
• Jackson Hole Symposium

GBP/USD technical price analysis: Overbought conditions

On the technical side, the GBP/USD price is approaching the 1.3150 key level. The bullish bias is strong because the price has traded above the 30-SMA for a long time without pulling back. At the same time, the RSI has traded in the overbought region as bulls maintained massive momentum. 

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However, as the price made new highs, the RSI has traded sideways, showing bulls have reached the limit. Therefore, bears may be ready to push the price lower and retest the 30-SMA support. Nevertheless, bulls might touch 1.3150 before temporarily giving up control.

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• BoJ’s Ueda reaffirmed his commitment to hike rates if inflation rises sustainably.

• Economists believe Japan’s central bank will hike rates one more time before the year ends.

• Powell’s speech might contain clues about the size and pace of future moves.

The USD/JPY outlook is mildly bearish as the yen strengthens after hawkish comments from the Bank of Japan Governor Kazuo Ueda. Meanwhile, the US dollar was under pressure ahead of Powell’s speech at the Jackson Hole symposium. 

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On Friday, BoJ’s Ueda had to explain before parliament why the central bank surprised markets with a rate hike at the last meeting. He reaffirmed his commitment to hike rates if inflation rises sustainably. Economists believe Japan’s central bank will hike rates one more time before the year ends. The last rate hike caused turmoil in global markets as investors unwound the popular carry trade. 

Initially, investors borrowed the low yielding yen to buy high yielding US assets. However, when the Bank of Japan started tightening its monetary policy, investors panicked. However, Ueda’s tone showed policymakers were ready to keep increasing borrowing costs.

Meanwhile, in the US, Fed policymakers on Thursday supported the outlook for a rate cut next month. They dropped the previous cautious tone, indicating confidence that inflation will reach the 2% target. At the same time, markets are implying a 73.5% chance the central bank will cut rates by 25 bps. 

The focus is now on the Jackson Hole symposium. Powell’s speech might contain clues about the size and pace of future moves. Investors will likely react more to clues about policy after September.

USD/JPY key events 

• Fed Chair Powell Speaks
• Jackson Hole Symposium

USD/JPY technical outlook: Price consolidates around 0.382 Fib

On the technical side, the USD/JPY price has risen to retest the 30-SMA resistance. However, the bias remains bearish since it has stayed below the SMA and the RSI is slightly under 50. Nevertheless, there is little enthusiasm to make large swings. 

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Neither bears nor bulls are ready to push the price too far away from the SMA. This is a sign of indecision. At the same time, the price has remained near the 0.382 Fib level. If bears regain momentum, USD/JPY will bounce lower to the 142.56 support level. Otherwise, it might break above the SMA to retest the 149.01 resistance.

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• EUR/USD edges higher as the US Dollar drops as traders shift their focus to Fed Powell’s speech at the Jackson Hole Symposium.
• Investors look for fresh interest-rate guidance for September and the remainder of the year.
• The ECB is widely anticipated to cut interest rates again in September.

EUR/USD recovers mildly to near 1.1120 in Friday’s New York session after correcting from a fresh year-to-date high of 1.1174 on Thursday. The major currency pair edges higher as the US Dollar (USD) resumes its recent weakness after a decent recovery move a day earlier, amid caution ahead of Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to near 101.30 after recovering from a more-than-seven-month low of 101.00 to nearly 101.60 on Thursday. The US Dollar bounced back strongly after the flash US S&P Global PMI report for August showed that the Composite PMI came in better than estimated at 54.1. Overall, the report showed that business activity was boosted by a robust expansion in the services sector, while the manufacturing part of the economy contracted at a faster-than-expected pace.

In his speech at the JH Symposium – scheduled at 14:00 GMT – Jerome Powell is expected to provide cues on interest rates and the United States (US) economic outlook. Market participants are keen to know the size of interest rate cuts in the September meeting, given that a “vast majority” of officials said that “if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting,” according to Federal Open Market Committee (FOMC) minutes of July 30-31 policy meeting.

Investors also consider the chances of the US economy to achieve a “soft landing”, knowing that price pressures are on track to return to the desired rate of 2%. Fears of a potential US recession escalated after the Nonfarm Payrolls (NFP) report for July indicated a sharp slowdown in the labor demand and an increase in the Unemployment Rate to 4.3%, the highest level seen since November 2021.

Analysts don’t expect Jerome Powell to provide a preset interest rate path. However, he may call rate cuts in September as appropriate, given that risks have now expanded to both aspects of dual mandate (inflation and employment).

Daily digest market movers: EUR/USD edges higher despite optimism over ECB rate cuts 

• EUR/USD edges higher from the round-level support of 1.1100 as investors underpin the Euro (EUR) against the US Dollar. However, the Euro is underperforming against other major peers as markets increasingly expect the European Central Bank (ECB) to reduce interest rates again in September.
• Rising expectations of ECB rate cuts in September are supported by the uncertainty over the Eurozone’s economic outlook and cooling wage pressures. 
• The flash Eurozone HCOB PMI report for August, released on Thursday, rose to 51.2, higher than expected, indicating that overall business activity expanded at a faster pace. However, this rosy picture signaled by the PMI surveys was linked to strong demand from the Olympic Games in Paris and it is likely to be short-lived rather than structural. Therefore, the uncertainty over the economic performance in the coming months remains intact.
• PMI data also signaled that business activity in the Eurozone’s largest economy, Germany, declined sharply mainly due to a significant drop in foreign demand, with no recovery in sight, signaling the need for fresh stimulus to boost demand.
• Meanwhile, a sharp decline in the Q2 Negotiated Wage Rates propelled hopes of more ECB rate cuts this year. The data, which was released in Thursday’s European trading hours, showed that Negotiated Wage Rates grew at a slower pace of 3.55% from 4.74% in the first quarter this year, easing fears of inflation remaining persistent.
• Economists at ING said in a note on Thursday, “The European Central Bank has remained uncomfortable with cutting interest rates while wage growth is elevated.” Lower wage growth in Q2 should help ease policymakers’ concerns in this matter.

Technical Analysis: EUR/USD rises toward 1.1200

EUR/USD holds above the round-level support of 1.1100, with investors focusing on Fed Powell’s speech at the JH Symposium. The outlook of the shared currency pair has remained upbeat after a breakout of a channel formation on a daily time frame. All short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong uptrend.

The 14-day Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, touching overbought levels but still suggesting a strong upside momentum.

In case of a decisive break above the December 28, 2023, high at 1.1140, Euro bulls could aim to recapture round-level resistance of 1.1200. On the downside, the round-level figure of 1.1100 acts as a major support zone.

• GBP/JPY may find immediate resistance around the 21-day EMA at 191.63.
• The daily chart analysis indicates a potential for a weakening bullish bias.
• A breach below the ascending channel could signal the emergence of a bearish bias.

GBP/JPY retraces its recent gains from the previous two days, trading around 190.90 during the Asian session on Friday. The daily chart analysis indicates that the pair is attempting to break below the lower boundary of the ascending channel, suggesting a potential for a weakening bullish bias. Additionally, the 14-day Relative Strength Index (RSI) is positioned below the 50 level, indicating that bearish momentum is in play.

The MACD (Moving Average Convergence Divergence) line is above the signal line, suggesting that there is some upward momentum in the short term. However, the MACD line is still below the zero line, signaling the overall trend is still bearish. This could indicate a potential recovery or a temporary upward movement within a broader downtrend.

In terms of resistance, the 21-day Exponential Moving Average (EMA) at 191.63 level appears as the immediate barrier. A break above the 21-day EMA could reinforce the bullish sentiment and support the pair GBP/JPY cross to explore the region around the upper boundary of the ascending channel at the 195.50 level.

On the downside, a successful breach below the ascending channel may cause the emergence of the bearish bias and put downward pressure on the GBP/JPY cross to navigate the area around the seven-month low at 180.09 level, which was recorded on August 5. Further support appears at throwback support at 178.50 level.

GBP/JPY: Daily Chart