Article by: ETO Markets
Sentiment in currency markets this week has suggested that fears of a US recession have eased. Still, traders widely expect the Fed to cut rates by 50 basis points at its September meeting. The latest ISM services PMI report, which showed the US economy continues to grow at a healthier pace, provided some comfort to market participants. However, the market's attention was focused on the upcoming jobless claims data. It is expected to fall to 240K from 249K previously, which will give further clues on the state of the US economy.
In addition, Richmond Fed President Thomas Barkin will officially take office on Thursday, which has the market's attention. Despite last week's decision to leave interest rates unchanged, the Fed said it could act if future inflation data held up well and the labor market weakened further. According to the CME FedWatch tool, there is a 63.5 percent chance that the Fed will cut rates by 50 basis points at its September meeting, down slightly from 68 percent a day earlier. This expectation has put some pressure on the dollar, while having an impact on market sentiment.
Geopolitically, tensions in the Middle East have also had an important impact on the forex market. The conflict between Israel and Hamas has intensified, and U.S. intelligence has warned that Hamas could retaliate against Israel. In addition, Iran's relations with Israel are strained, and Egypt has advised its airlines to avoid Iranian airspace. These geopolitical risks have increased the market's safe-haven demand, driving up the price of safe-haven assets such as gold. However, despite the increase in risk aversion, the market's focus on the US economic data and the Fed's policy path remained the main factors influencing the FX market.
The EUR/USD came under further selling pressure, extending Tuesday's correction and returning to the key 1.0900 level. This was largely influenced by the rebound in the US dollar (USD) this week and the generally positive tone in global equity markets.
The dollar index (DXY) bounced back after falling to the 102.00 area on Monday and climbed further above 103.00 on Wednesday. This rally was supported by additional depreciation of the yen and a general rise in US yields. Also bolstering sentiment were recent comments from Federal Reserve officials A. Goolsbee and M. Daly, who suggested the market may have overinterpreted recent U.S. labor market data, ruling out A recession but suggesting a rate cut could be in order to avoid it.
Meanwhile, German 10-year Bund yields extended this week's rally to reach 2.30 percent, in line with the trend in global yields. This further supports the strength of the dollar.
The EUR/USD is currently fluctuating around the … level, and from the four-hour chart, the pair shows some consolidation action. Initial resistance stands at …, the August 5 high, with further resistance at …, close to the December 28, 2023 peak of …. A break above these levels could lead to further upside. On the downside, the next target for the pair is the 200-day Simple Moving Average (SMA) of …, with further support at … (weekly low on August 1) and … (low on June 26), which were support levels prior to the May 1 low of …. As long as the pair can remain consistently above the key 200-day SMA, the overall positive bias should remain.
The USD/JPY surged sharply late in the North American session, gaining more than 1.50% or 240 basis points. The rally was largely driven by comments from Bank of Japan officials that it would not raise interest rates amid unstable market conditions. The comments sent the pair rallying from the day's low of 144.28 and trading around 146.86 at the time of writing.
In addition, the market was also influenced by some economic data. Japan's latest foreign investment data showed that foreign investment in the Japanese stock market was -64.17 billion yen, slightly lower than the expected -61.29 billion yen. Japanese bank lending (Y/y) data was in line with previous and expectations at 3.2%. The data reflect the challenges facing Japan's economy and further reinforce the Bank of Japan's stance to keep monetary policy loose.
On the other hand, US economic data also supported the dollar. On Thursday, the U.S. will release initial jobless claims data, which is expected to show continued resilience in the labor market. These data could affect market expectations for the Federal Reserve's monetary policy, which could further impact the USD/JPY.
From a technical point of view, the USD/JPY rally on Tuesday, although brief, was driven by comments from the Bank of Japan official, and the pair made a significant reversal, closing below … on Tuesday, but is now on track for its biggest gain since March 2023. If USD/JPY continues to rise and breaks above the … level, this could intensify the possibility of a test of Tenkan-Sen (…). Further gains will face resistance at …, followed by the 200-day moving average (DMA) at …. Conversely, if sellers push the exchange rate below the August 6 high of …, this will pave the way for a further correction. The next support will be at …, followed by …. A break below these levels could see further losses find support below the August 6 low of ….
