Investing.com – The foreign exchange markets have seen a great deal of volatility over the last few weeks, and this has resulted in JPMorgan (NYSE:JPM) adjusting its dollar forecasts.

The months of July and August will go down as one of the more memorable macro&political volatility episodes in recent history, analysts at JPMorgan said, in a note, dated Aug. 14.

“Over the course of six weeks, investors witnessed the replacement of a U.S. presidential nominee, an assassination attempt, a +10% JPY TWI [trade-weighted index] rally, a pivot to jumbo Fed cuts in September, and the single-largest intraday spike in VIX since 1990, among others events,” the bank said.

The foreign exchange response has been pronounced though the dust has yet to fully settle, the bank added, but the broad contours point to low-yield short-covering, high-yielding / pro-cyclical underperformance, and a volatile but net-weaker U.S. dollar.

The main FX casualty in the volatility spike was FX carry, which will be hard-pressed to recover the dominant status it enjoyed throughout the last 12-18 months.

Year-to-date carry returns have since been erased, and the bank’s various proxies for the broader carry trade positioning point to 65%-75% of those positions having now been unwound.

The dollar’s response to all this falls somewhere between as-expected and slightly disappointing, the bank added, with the 100-basis-point rally in the U.S. short-end simply too large for the dollar to ignore.

JPMorgan has lowered its USD forecasts, particularly through the USD/JPY pair. It now sees its USD/JPY forecast across the horizon to 2024/4Q at 146 and 2025/2Q at 144, from 147.

“We still see reasons to be optimistic on USD’s overall prospects: 1) the U.S. labor market is weakening but other data since have been ok; 2) RoW cyclical data isn’t sufficiently strong to drive USD lower; 3) the USD historically tends to consolidate after such large rate swings; 4) USD-positive risks from the US election still linger; and 5) August seasonality tends to be supportive for USD,” JPMorgan added. 

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• The Pound Sterling dipped to $1.28 in early trading on Wednesday, pulling back from a three-week high earlier in the month after UK inflation figures raised bets on interest rate cuts by the Bank of England.
• Annual inflation rose as expected but less than forecast at 2.2%.
• Services inflation also declined to 5.2%, its lowest level in two years and below the central bank’s forecast of 5.6%.
• Core inflation also slowed more than expected. The probability of another 25-basis point cut in September rose to 47% from 36% before the release.

As such, traders are now pricing in two more quarter-point cuts by the end of the year. Meanwhile, economic data released earlier in the week showed surprising strength in the UK labor market. The unemployment rate fell to 4.2% in the three months to June, missing expectations for a rise, and wage growth slowed to 5.4% from 5.8%, although it was still slightly above the Bank of England’s forecast.

In other trading, the UK 10-year bond yield fell below 3.9%, nearing a six-month low hit earlier in the month, after consumer price inflation came below expectations. Also, UK inflation rose to 2.2% in July, below the 2.3% forecast, with services inflation slowing markedly. The lower-than-expected inflation, although slightly above the Bank of England’s 2% target, supports speculation that the BoE may cut interest rates at its next meeting.

With the US trading session underway, bulls found an opportunity to push the GBP/USD pair towards the resistance of 1.2868 before quickly returning to stabilize around 1.2820 at the beginning of trading on Thursday, ahead of the release of a batch of important US and UK economic data. On the other hand, Bank of England officials are downplaying the significance of the unusual stall in the UK’s most important market interest rate, saying it remains effective in reflecting what’s happening in the markets. The overnight indexed swap rate, or SONIA, has remained at exactly five basis points below the Bank of England’s rate since May 7 – or 70 business days. The previous record for data dating back to 1997 was only four sessions.

For their part, Bank of England officials said in a blog on Wednesday: “The stability of the SONIA rate for a long period is unprecedented. Given that the rate continues to reflect what is happening in the market – a change in market behavior that affects the shape of the distribution of prices – it is not necessarily a cause for concern.”

SONIA, which is referenced in over £90 trillion ($116 trillion) of new transactions annually, represents the average interest rate at which British banks borrow sterling overnight from other financial institutions. Furthermore, it is a key tool in the Bank of England’s monetary policy transmission as it is used to price financial contracts ranging from derivatives to mortgages.

Technical forecasts for the GBP/USD pair today:

Based on the daily chart, GBP/USD is trying to break the downtrend and may succeed if it moves towards the resistance levels of 1.2890 and 1.3000 respectively. On the other hand, and in the same time frame, a move towards the support level of 1.2750 will be important for the strength of the bears’ control over the general trend again. Today’s GBP/USD pair will be affected by the announcement of the UK economic growth reading.

As for the US dollar, it will be affected by the announcement of the US retail sales figures, the US weekly jobless claims number, and the Philadelphia manufacturing index reading. Finally, this is in addition to indications from global central bank officials regarding the future of tightening or not.

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• The British pound has initially fallen against the Japanese yen in the early hours on Wednesday, only to turn around and show signs of life again.
• When I look at the pair, the first thing that I notice in my daily analysis is that the 190 yen level continues to offer a bit of a short-term ceiling.
• It is because of this that I am paying close attention to this level because if we can break above it, I think it brings in more FOMO trading, at least for the short term.
• Keep in mind, traders out there are still asking questions as to whether or not the carry trade can return, and that will be a big deal.

Potential Carry Trade Return?

This is a pair that the interest rate is wide enough to drive a semi-truck through. So, you obviously get paid quite well to hang on to it. The Bank of Japan has recently started to tighten monetary policy, but the reality is that they probably can’t do it for a significant amount of time. So, I would anticipate that sooner or later the carry trade does come back into vogue. If and when that happens, then this is a pair that could make new highs.

Do not get me wrong, though, I don’t think that happens easily, nor do I think it happens in the short term. In the short term, I would anticipate more of a buy on the dip attitude, but if we were to break down below the 182 yen level then I think we began the next leg lower.

We have seen a lot of destruction in this pair and all Japanese yen related pairs So at the very least I think you’re going to see traders be a bit hesitant to get involved to the upside However, there will come a point where it becomes obvious that the momentum has picked back up and traders will almost certainly do what they normally do and take advantage of the interest rate differential in the currency pair.

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• The first thing I see is that we had sold off early in the trading session, but we have turned around to show momentum yet again.
• Because of this, it looks as if the market is going to continue to favor the upside in general, but I am aware that there are a few places that we need to pay close attention to on the chart.
• The first place that I am watching with great interest is the 1.2875 region, because we can break above there, then it’s likely that more momentum will enter the market.

Retail Sales and Unemployment Claims

On Thursday, we will get vital information coming from the United States that could greatly influence where this market goes. While the default scenario at this point in time is that the Federal Reserve cut rates in September, the Retail Sales figures and of course the Weekly Unemployment Claims number could give us a bit of a “heads up” as to whether or not the Federal Reserve will continue to cut rates beyond the September meeting. In other words, this is a situation where traders are more likely than not to continue to pay close attention to the directionality of the US economy.

That being said, there does come a point where the US economy falling is actually a bad thing for all risk appetite, and you will more likely than not see money running back into the Treasury market, meaning that the US dollar could strengthen. Having said that, I don’t think that’s the short term bias, and it looks as if we are going to eventually try to break to the upside, perhaps aiming for the crucial 1.30 level above.

The 1.30 level of course is a large, round, psychologically significant figure, but it’s also worth noting that it has been pierced previously over the last couple of months. Short-term pullbacks at this point in time should continue to see plenty of support near the 50-Day EMA, perhaps even down at the 200-Day EMA which is closer to the 1.2675 region.

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Reserve Bank of New Zealand Governor Orr spoke to various media, further conveying his message that the Bank intends to lower interest rates toward a more neutral setting at a measured pace. The RBNZ began its easing cycle on Wednesday, Orr was out selling it today again. The New Zealand dollar hasn’t done a lot on the session. It dipped but bounced back with the rising AUD (more to comeon this)

From Japan we had data for Q2 GDP, showing the economy expanded by a much faster-than-expected annualised 3.1% in the quarter. It rebounded from the contraction in Q1. Consumption grew strongly. The Bank of Japan will be eyeing this as support for its rate hike cycle. The yen weakened a little but is back to mid range and thereabouts as I post.

Australia’s economy added 58,200 jobs (full-time employment rocketed 60,500, for a third month of strong gains) in July after the 52.2K rise in June. Participation rose to a record high, while the unemployment rate ticked up a little to 4.2%. AUD/USD has risen from pre-data lows of under 0.6575 to 0.6620+ as I post.

The regular People’s Bank of China Medium-term Lending Facility (MLF) operation did not take place today. Its been scheduled for August 26. The Bank added in nearly 600bn yuan in a 7-day reverse repo, which more than covers the 401bn yuan of MLF maturing. See bullets above for more info if needed.

“Core services inflation (0.31% m/m) – the sticky component the Fed has been worried about – bounced back in July from its weakest monthly reading since 2021.”

The CPI Report shifted the focus to the US labor market data and the US economy. The Fed hawks may have little ground to keep interest rates unchanged if there’s a marked deterioration in labor market conditions.

Short-term Forecast: Bearish

USD/JPY trends will hinge on Japan’s GDP and US economic data. Upbeat GDP numbers from Japan and weaker US data could push the USD/JPY toward 145.

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

A USD/JPY breakout from the 148.529 resistance level and the top trend line could signal a move toward 150. Furthermore, a break above 150 could bring the 151.685 resistance level into play.

Economic indicators from Japan and the US require consideration on Thursday.

Conversely, a drop below the 145.891 support level could signal a fall toward the 143.495 support level.

The 14-day RSI at 33.31 suggests a USD/JPY break below 147 before entering oversold territory.

• Recently, the EUR/USD exchange rate has consolidated its gains made in early August in recent trading, but it may have room to decisively overcome the nearby resistance around 1.0935 and approach the 1.10 level in the coming days.
• According to reliable trading platforms, the EUR/USD pair did not change much last week after giving up the big gains the pair made on Monday over the following days.
• Moreover, the losses were limited to a small part of the progress it made in early August, and the trend remains up.

This is due to the significant increase on August 5th when US jobs data for July surprised expectations sharply, prompting markets to bet on multiple US interest rate cuts by the end of the year. Commenting on the performance of the currency pair and the influencing factors, Jane Foley, head of FX research at Rabobank, said on Friday: ‘We have largely removed our three-month target of 1.05 for the EUR/USD pair based on the view that imminent interest rate cuts by the Federal Reserve are likely to prevent a decline to this level this year.’ The analyst added, “For now, we continue to favor selling EUR/USD on any moves towards 1.10”.

The bets on an interest rate cut of up to 100 basis points have seen the euro begin to erode the technical resistance around 1.0935, and we might see the EUR/USD pair set its sights on the psychological resistance level of 1.10 this week. This is partly due to polls indicating that Democratic Party presidential candidate Kamala Harris has turned the tables on former President Donald Trump. Also, because the U.S. inflation figures for July, which will be released on Wednesday. Obviously, this data is likely to reinforce market expectations of an imminent rate cut by the Federal Reserve.

According to Rabobank analysts, “From a 3 to 6-month perspective, we see potential risks for price increases due to the weakness of the U.S. dollar rather than the strength of the euro. This could be due to a weaker-than-expected U.S. economy or a Harris win in the election, although our baseline forecast is based on a Trump victory.”

Overall, the recent shift in the polls undermines one of the key sources of support for the US dollar and its outlook through the end of the year as Trump’s protectionist trade policy agenda and use of tariffs is quite positive for US business investment, output, employment and GDP. However, the consensus also sees US inflation rising 0.2% m/m when July data is released on Wednesday, with the annual rate expected to be cut to 2.9%, from 3%. Consequently, this keeps the US deflationary process intact and should weigh on the dollar as it is loosely negatively correlated with inflation.

The recent breakdown of the U.S. dollar exchange rate and the upward breakout of the EUR/USD pair suggest that the pair may be on the verge of closing the gap with its fair value, which is around 1.1577, up from 1.1511 at the beginning of the year.

This estimate is derived from the analyst’s fair value model, which uses inflation, interest rates and the spreads between their cross-currencies to estimate where currencies should trade as inflation rises and falls.

On the stock trading front, US stock markets start the week with mixed performance. US stock markets struggled to maintain momentum on Monday, after a turbulent week, as investors braced for a week of crucial economic data. According to trading, the S&P 500 closed lower, the Nasdaq added 0.2% and the Dow Jones lost 140 points.

This week, according to the economic calendar, the focus will be on key indicators such as the US Consumer Price Index, Producer Price Index, Retail Sales and Industrial Production. Clearly, those data are expected to shed light on the strength of the US economy and the ongoing inflation challenges.

According to market trading, Real estate and telecommunications services led the losses of the session while technology, energy and utilities sectors closed in the green. Among the stocks, shares of Nvidia rose 4% as the chipmaker aimed to overcome concerns about its next-generation processors. In contrast, shares of Qualcomm fell 1% after its rating was downgraded from outperform to peer perform. Shares of JetBlue Airways plunged 20.7% after announcing plans to borrow $2.75 billion, using its loyalty program as collateral.

EUR/USD Technical analysis and forecast:

According to the performance on the daily chart attached, the Euro against the US Dollar EUR/USD price is in a neutral position. Technically, the bulls will prevail if it succeeds in breaking the psychological resistance of 1.1000. On the other hand, and over the same period of time, the upward efforts will fail if the bears return the EUR/USD pair towards the support level of 1.0820. As we mentioned before, the EUR/USD price will remain in a narrow range until the markets and investors react to the announcement of the US inflation figures and statements by US Federal Reserve officials.

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EUR/USD Current price: 1.1038

• The US Consumer Price Index eased further in July, fueling the market’s optimism.
• Investors are pretty much convinced about an upcoming rate cut from the Fed.
• EUR/USD trades at its highest since January and aims to extend the advance.

Optimism reigned throughout the first half of the day, putting pressure on the US Dollar. The EUR/USD pair surged above the 1.1000 threshold and traded as high as 1.1034 during the European session and ahead of first-tier data. 

The upbeat mood resulted from mounting speculation that the United States (US) Consumer Price Index (CPI) will support an interest rate cut when the Federal Reserve (Fed) meets in September. The release of the softer-than-anticipated US Producer Price Index (PPI) on Tuesday acted as a catalyst, sending high-yielding stocks firmly up.

The US inflation data finally came out and initially hit the USD. The CPI rose by 2.9% on a yearly basis in July, easing from 3% in June. The annual core CPI, which excludes volatile food and energy prices, rose 3.2%, below the 3.3% previous, although matching expectations. Finally,  the monthly CPI and the core CPI MoM both rose 0.2%.

The US Dollar initially fell with the news, as it meant the Fed would likely deliver an interest rate cut in September. But after a few minutes, the market understood the news did not change much what it believed before it. As a result, the USD recovered some ground, but not enough to turn bullish. Ahead of Wall Street’s opening, markets are still struggling for direction, although risk appetite prevails.

EUR/USD short-term technical outlook

The daily chart for the EUR/USD pair shows it has already surpassed the aforementioned intraday high, extending gains and maintaining its positive momentum. The pair further advanced beyond bullish moving averages, with the 20 Simple Moving Average (SMA) accelerating higher above the 100 and 200 SMAs. Technical indicators, in the meantime, approach overbought readings with modest upward slopes without any other sign of upward exhaustion.

The near-term picture indicates resurgent buying interest. In the 4-hour chart, technical indicators keep advancing despite already developing within extreme readings. At the same time, the 20 SMA accelerated north above the longer ones. The current 1.1040 area offers resistance ahead of 1.1085, the next level to watch should EUR/USD maintain its strength.

Support levels: 1.0990 1.0950 1.0900

Resistance levels: 1.1045 1.1085 1.1120