AUD/USD, USD/JPY go their separate ways as USD bears drive sentiment

Last one to sell the US dollar is a rotten egg, appeared to be the theme on Monday. Traders appear to be pricing in a very dovish Jerome Powell speech from Jerome Powell at Jackson Hole on Friday. Which is a bit odd, as markets have been aggressively dovish for quite some time anyway. And that leaves the risk of markets being too dovish for their own good by the time he hits the wires. Perhaps Powell will confirm market pricing, which could prompt profit taking and a rebound for the US dollar, or he doesn’t confirm it and causes an even larger US dollar rebound.

A slim majority of economists polled by Reuters now expect three 25bp cuts from the Fed this year and for the economy not to slip into a recession. With a September cut all but a given, the Fed will need to cut at each of the three remaining meetings or treat consumers to a 50bp cut for Christmas.

• Wall Street indices marched higher, allowing the S&P 500 to claim its best streak of 2024 with eight consecutive bullish closes.
• It was wishful thinking hoping for a pullback on AUD/USD, which instead reached my week’s upside target outlined in AUD/USD weekly outlook video.
• EUR/USD reached a YTD high and stopped just shy of the 1.11 handle.
• WTI crude oil fell a further -2.5% on reports of a ceasefire in Gaza.

US dollar index technical analysis:

DXY futures closed beneath the 102 handle and July trendline and closed near the low of the day. For now, momentum points lower for the US dollar index, and it shows the potential for at least another minor dip. A support cluster between 101.4 – 101.72 could provide support over the near term and keep gains limited for other currency pairs against the dollar. The zone includes the March low, January VPOC (volume point of control) and 101.50 level.

A break beneath this zone brings 101 into focus. Should prices manage to recover, bears could look to fade into moves around the 102 handle or the 102.40 weekly VPOC.

Events in focus (AEDT):

• 08:45 – NZ trade balance
• 11:05 – PBOC loan prime rate
• 11:30 – RBA minutes
• 16:00 – DE PPI
• 19:00 – EU CPI
• 19:30 – SNB Chairman Jordan speaks
• 22:30 – CA CPI
• 03:35 – FOMC member Bostic speaks

AUD/USD technical analysis:

I’m revisiting AUD/USD a lot sooner than I expected, simply because it reached my week’s upside target by Monday night. Still, it was nice to see that Monday’s high landed around the June VPOC and upper 1-week implied volatility band.

Given the US dollar index shows the potential for another dip, we should be on guard for AUD/SUD to extend its rally. I doubt it will simply break above 68c, and there’s no assurances it will reach the milestone level today. But with bullish momentum on its side, I suspect dips will be sought by bulls, who may at least have another crack at 68c – even if it does trigger the pullback.

USD/JPY technical analysis:

Given that USD/JPY saw a hefty -12.5% drop from its July high, I suspect the bounce that began in August has more to give. The fact it held above the January and December lows also adds weight to a bigger bounce than the one presented.

USD/JPY is clearly retracing lower against the August bounce, but my bias is to seek dips above 144 in anticipation of another leg higher. The lower wick on Monday also shows that bears were losing steam in the later stages of the US session.

The 1-hour chart shows a strong bearish move below 146 and a mild rebound. Another dip lower and break of Monday’s low does not seem impossible. But as I am looking dips towards 144, a false break of Monday’s low would be welcomed. For now I’ll keep a conservative upside target of 150. But if Jerome Powell is not as dovish as many hope on Friday, USD/JPY could bounce a lot higher.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge