Don’t be fooled by the mild rebounds on USD/JPY and AUD/JPY

Jerome Powell tipped his hat towards a strong US economy and reiterated confidence that inflation will move towards the Fed’s 2% target, although he warned that interest rate cuts are not on a “preset course” and timing will be down to economic conditions.

Still, bets of an October ECB cut were given a boost with weaker-than-expected data from Germany, rising just 1.6% y/y compared to 1.9% forecast. EUR/USD formed a bearish outside day which helped the USD index rebound from the 100 support cluster once more. The case for a countertrend move higher on the US dollar continues to build in my view. AUD/USD formed a second shooting star day and looks set for some mean reversion lower, a move which has already begun for gold which traded lower for a second day from frothy heights.

The S&P 500 closed higher for a fourth consecutive quarter to mark its best such run since 2021. A bullish engulfing day also formed on Monday and it closed within a cats-whisker of its all-time high, a level that seems very likely to break. Apple shares may also be eyeing a record high, with the stock trading just -1.8% beneath its record.

China’s stock market rally went hyperbole mode ahead of golden week, with the CSI 300 closing above 4,000 for the first time since August 2023. The Hang Seng closed above 21k and reached its highest level since February 2023. Yet their respective futures markets were lower overnight, presumably on profit taking ahead of the week’s long holiday after eye-watering gains.

Events in focus (AEDT):

Flash manufacturing PMIs for September kick off in Australia and Japan today, followed by Europe and the US later. Australia’s PMIs rarely make much of an impact on the local markets, but when coupled with Japan they can shape expectations of what to expect in Europe and the US. However, manufacturing tends to be the underperformer overall so the best we’ll likely see if contraction at a slower pace.

The ISM manufacturing PMI for the US is the main event, which can be seen as the warmup for ISM services later this week. The report provides underlying trends for growth, inflation and employment and therefore can spark some volatile reactions for US markets, particularly with NFP lined up on Friday.

• 09:00 – AU manufacturing PMI
• 09:30 – JP unemployment rate, jobs/applications ratio
• 09:50 – BOJ summary of opinions
• 10:30 – JP manufacturing PMI
• 11:30 – AU building approvals
• 16:30 – AU commodity prices
• 17:00 – ECB’s De Guindos speaks
• 18:00 – EU manufacturing PMI
• 19:00 – EU CPI
• 23:30 – CA manufacturing PMI
• 23:45 – US manufacturing PMI
• 00:00 – US ISM manufacturing
• 01:00 – FOMC member Bostic speaks
• 01:10 – Fed Governor Cook speaks
• 01:15 – SNB Vice Chairman Schlegel speaks
• 01:30 – ECB Schnabel speaks

USD/JPY technical analysis:

The combination of softer US inflation and a hawkish BOJ resulted in an impressive bearish engulfing (and bearish outside) day on Friday. Yet the rebound of the us dollar on Monday helped it par some of Friday’s losses, with the pair now mulling a break of 144. But even if it does, I’m not anticipating a direct break above 146.50 given we have several key data points looming ahead of Friday’s NFP report.

If anything, we’re more likely to see prices prattle around within Friday’s range, which could be more favourable to intraday traders with shorter hold times in mind.

Momentum on the 1-hour chart points higher, although the RSI 14 is confirming the rise with no immediate signs of a bearish divergence. A small one has formed on the RSI 2. Prices are hugging the weekly pivot point, and we could see the market try and print another high this session. However, given the strength of the decline from 146.50, the bias is to seek signs if weakness and fade into any such rally in anticipation of a move back to 143. I’m not looking for any oversized moves and anticipated prices to remain within the range of the past two days.

AUD/JPY technical analysis:

IN many ways the price action on AUD/JPY is similar to USD/JPY. We have seen a bearish engulfing / outside day on Friday and around half of the day’s losses were recouped on Monday. Yet the standout feature on this chart is that Friday’s high almost perfectly respected the high-volume node (HVN) of the decline from the July high to August low.

Also note that the engulfing candle closed beneath 100 after an intraday break above it, adding weight to the case for an important swing high. Of course, the missing element for a decent move lower is a risk off environment, so for now my approach is similar to that as USD/JPY: seek a cheeky swing trade short on the 1-hour chart.

Prices are trying to trend higher on the 1-hour chart, although my is to seek signs of weakness and fade into moves towards the 99.60 – 100 zone.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge