USD/JPY, USD/CHF: Data vacuum, dovish Fed pricing may provide US dollar near-term reprieve

• DXY, USD/JPY, USD/CHF continue to be driven by Fed rate expectations
• Markets continue to price around 100 basis points worth of Fed rate cuts in 2024
• There is no meaningful job market data in the States until next Friday
• Incoming second-tier data is volatile in nature, carrying the potential to provide false signals and ignite unwind of dovish rate cut bets

Overview

While they are very different in terms of geography and economic structure, the US dollar index (DXY), USD/JPY and USD/CHF continue to be driven by the exact same thing: market expectations for what the Federal Reserve will do with interest rates in the months ahead.

DXY, USD/JPY, USD/CHF still moving with US rates

This chart underlines that point, showing DXY in the left-hand pane, USD/JPY in the middle pane and USD/CHF on the right using an hourly tick. The blue line in the pane below each chart is the rolling 120-hour correlation with expectations for the Fed funds rate over the remainder of 2024 based on futures markets. The timeframe used represents the relationship over the past five sessions. The pane below that is the rolling 120-hour correlation with US two-year Treasury yields.

While there are nuances in each hourly chart, from a directional perspective, each continue to march to the evolution of US short-dated interest rate expectations. Every correlation coefficient score sits at 0.83 or more, indicating a strong positive relationship between the two variables.  

With Jerome Powell leaving little doubt that incoming labour market will play a key role in determining when and by how much the Fed will cut rates in the future, it means these FX pairs are likely to be hyper-sensitive to any data linked to the health of the jobs market moving forward.

Data vacuum arrives at inopportune time for directional cues

Unfortunately for traders craving directional cues, there’s no meaningful jobs data out until the August payrolls report next Friday, leaving a vacuum for markets to speculate and overreact to new information, no matter how spurious the link to the jobs market. Jobless claims and soft surveys like the Conference Board’s consumer confidence survey are noisy in isolation, yet they’ll likely drive big moves in markets this week, potentially rivaling Nvidia’s earnings report and personal spending, income and inflation data on Friday.

To me, it points to the likelihood that technicals and market positioning may play on outsized roles in determining how DXY, USD/JPY and USD/CHF fare over the remainder of the week.

Markets priced for continued US data weakness

With futures pricing just over 100 basis points worth of cuts this year and nearly 200 to September 2025, with most of those totals coming in the past few weeks, I get the sense that it may be difficult for traders to add to dovish bets without being provided a clear signal to do so. That suggests we may see pricing curtailed a touch before next week given the risk incoming data may not fit with the prevailing dovish narrative.

If that is the case, it may release some of the downside pressure on the dollar, allowing it room to reverse some recent losses.

DXY bounces from December 2023 low

Looking at DXY on the daily chart first, it’s notable the index bounced on Monday after briefly falling below 100.617, the lows set in late December last year when excessive Fed rate cut expectations were also being priced in.

For those considering longs looking for a squeeze higher, you could buy around these levels with a stop below Monday’s low for protection. DXY rebounds stalled above 101.50 last week, making that a potential target. Beyond, 102 would be another possibility. If the DXY were to reverse back below 100.617, 99.60 would be an obvious target for shorts.

USD/JPY downside may be capped near-term

Unsurprisingly, it’s a similar story for USD/JPY which also bounced on Monday after taking a peep below the August 6 low of 143.63. While from a longer-term perspective the bearish trend in RSI remains in place, nearer-term, we can see a slight divergence between RSI and price, with the former making higher lows as the price continues to ease lower. That’s one red flag for a potential near-term reversal in price.

Those contemplating longs could buy here with a stop below Monday’s low for protection. 146.30, 148.00 and former uptrend support located around 149.30 and potential targets, although we’d likely need to see a big reversal in Fed rate cut bets to see the latter levels. On the downside, 141.70 and 140.273 are levels of note.

Momentum may be shifting for USD/CHF

Like USD/JPY, bullish divergence between RSI and price for USD/CHF is also evident, hinting at potential upside risks. The pair has been respectful of .84518 recently, making that a potential level to build a long setup around. Buying above the level with a stop below is one option, allowing for traders to target .8560, .86171 or downtrend dating back to the highs struck in July.  

-- Written by David Scutt

Follow David on Twitter @scutty