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Gold has posted solid gains in July after bouncing off the four-month low of 1,892 in late June. Although bullion experienced a pullback following a fresh two-month peak of 1,984 on July 20, it stormed back higher in the last couple of four-hour sessions, claiming the 50-period simple moving average (SMA).

The momentum indicators are endorsing a bullish near-term bias. Specifically, the RSI is hovering above its 50-neutral mark, while the MACD turned positive after being below zero for two days. Considering that the price is trading above its upper Bollinger Band, traders should remain cautious.

If bullish pressures persist, the recent two-month high of 1,984 could prove to be the first barricade for the price to overcome. Piercing through that wall, gold could face 2,004, which is the 123.6% Fibonacci extension of the 1,983-1,892 downtrend registered in June. Should that hurdle fail, the 138.2% Fibo of 2,017 may curb further upside attempts.

On the flipside, bearish actions could send the price to initially test the 78.6% Fibo of 1,963, which coincides with the 50-period SMA. Even lower, the attention could shift to the 61.8% Fibo of 1,948 before the 50.0% Fibo of 1,937 appears on the radar. If that floor collapses, the 38.2% Fibo of 1,927 could provide downside protection.

In brief, gold posted a bullish breakout after trading sideways around its 50-period SMA for the past five days. Hence, the technical picture could remain bullish for as long as the price holds above that crucial threshold.

The Japanese yen is showing some strength this week and has gained 1.1%, rebounding from the previous week’s plunge of 2.2%. In Wednesday’s European session, USD/JPY is trading at 140.23, down 0.49%.

Spotlight on Fed, BoJ meetings

The US and Japanese central banks will be on center stage this week, with the Fed meeting later on Wednesday and the Bank of Japan on Friday.

The Fed is widely expected to raise rates today by 0.25%, which would bring the Fed Funds rate to a range of 5.25% to 5.50%. The FOMC will not release any economic forecasts, which means investors will be glued to Fed Chair Powell’s press conference, looking for clues about what the Fed plans to do with rates in the coming months.

The markets are confident that today’s rate hike will wrap up the current tightening cycle, but the Fed has not sounded as optimistic. Powell and other Fed members have warned that inflation is still too high and the battle is not over. True, inflation is under control at 3%, but there is still some distance to go before the Fed’s 2% inflation target is reached. Powell may take a middle-of-the-road approach in his remarks, hinting that the Fed will take a pause after today but keeping the door open to further hikes if needed.

Bank of Japan meetings used to be rather dull affairs with little or no impact on the currency markets. That has all changed in the world of high inflation, and even Japan is grappling with inflation which has persistently remained above the 2% target. This has put pressure on the BoJ to tweak its ultra-loose policy, as it did late last year when it widened the target band on 10-year Japanese bonds.

The BoJ has insisted that it won’t change policy settings at Friday’s meeting, but there is still speculation that the central bank could make a move and send the yen sharply higher. With inflation running around 3%, BoJ meetings have become market-moving events and investors will be keeping a close eye on Friday’s meeting.

USD/JPY Technical

• USD/JPY is testing support at 140.49. Below, there is support at 139.73
• There is resistance at 141.47 and 142.62

• Australian inflation falls more than expected
• Fed widely expected to raise rates by 0.25% on Wednesday

The Australian dollar is in negative territory on Wednesday. In the European session, AUD/USD is trading at 0.6758, down 0.49%. The Aussie fell as much as 0.90% earlier in the day but has recovered some of these losses.

Australian inflation declines more than expected

Australian inflation declined more than expected in the second quarter, sending the Australian dollar lower as pressure has eased on the Reserve Bank of Australia to raise interest rates.

Headline inflation rose 6% y/y in the second quarter, down from 7% in the first quarter and below the consensus estimate of 6.2%. June monthly inflation dipped to 5.4% y/y as expected, below the May reading of 5.5%. The RBA Trimmed Mean CPI, a key gauge of core inflation, fell to 5.9% y/y in Q2, down from 6.6% in Q1 and just below the consensus of 6.0%.

The positive inflation data was spoiled somewhat by services inflation, which accelerated to 6.3% in the second quarter, its highest level since 2001. A key factor driving up services inflation was higher rents, according to the Australian Bureau of Statistics.

The RBA meets on August 1^st and investors have lowered the odds of a rate hike following the positive inflation report. The probability of a rate hike has fallen to 31%, down from 41% prior to the inflation report, according to the ASX RBA rate hike tracker. The RBA will release updated economic forecasts at the meeting, and investors will be especially interested in the inflation projections.

What happens after August? An extended pause is the RBA’s preferred move, but that will likely require inflation to continue heading lower toward the 2% target. Otherwise, the RBA will still have work to do on the inflation front and would likely have to continue tightening rates.

Markets await Fed hike

The Federal Reserve is widely expected to raise rates at Wednesday’s meeting, and investors have priced a hike at close to 100%. This would bring the benchmark rate to a range of 5.25% – 5.50%. Investors expect a pause in September but the Fed has signalled another rate hike after Wednesday’s meeting. The Fed’s rate policy will depend to a large extent on inflation levels and the strength of the labour market.

AUD/USD Technical

• AUD/USD is testing support at 0.6767. Below, there is support at 0.6687
• There is resistance at 0.6811 and 0.6891

The Fed is widely expected to raise its benchmark interest rates by 25-basis points today; anything else would be a shocker.

The critical question that’s at the forefront of the market’s collective mind is whether this week’s Fed rate hike will indeed be the last of the cycle.

If Chair Powell leans into expectations that the FOMC is ready to pause, or at least skip a September hike, that may encourage further risk-taking across global financial markets.

However, should the Fed acquiesce to its June dot plot and swing the door wide open for yet another rate increase, such repricing should prompt an immediate but possibly limited recovery for the US dollar, while weighing on the likes of gold, stocks, and oil.

Chair Powell’s policy cues later today will also frame how markets interpret top tier US economic data, especially around jobs and inflation, in the leadup to the next FOMC meeting in September.

The dollar index is standing at the back foot on Wednesday, after hitting a two-week high, as traders decided to collect some profits and awaiting fresh signals from the Fed’s decision.

The US Federal Reserve FOMC two-day policy meeting ends today with widely expected decision for 25 basis points hike which will push the interest rate to 5.25%/5.50% range, the highest since 2007/2009 recession.

Today’s decision will mark the eleventh hike in past twelve meetings and likely to signal that the central bank is nearing an end of its hiking cycle, with wide expectations for one more 25 basis points hike until the end of the year.

Faster than expected easing inflation (although is still 2 ½ times above Fed’s 2% target), accelerating economic activity which shows that the US economy is more resilient to rising interest rates than expected and tight labor market (ongoing employment growth and jobless rate at the lowest levels) contribute to scenario of hiking cycle end in the near future.

The central bank shifted its approach to monetary policy from rapid rate hikes to decisions based on meeting-by meeting evaluation of the economic data.

Technical studies on the daily chart show increasing downside risk after the dollar closed in red on Tuesday for the first time in six days and generating an initial signal that five-day recovery rally might be at the end.

Formation of a bull-trap above 101.23 (daily Kijun-sen / 50% retracement of 103.25/99.20 bear-leg) contributes to negative signals from overbought stochastic and 14-d momentum in negative territory, keeping in play the risk of pullback.

Larger picture remains bearish and show broader downtrend from 2022 peak (114.72) intact, with the latest bounce seen as a healthy correction on daily chart and a mild price adjustment on weekly, suggesting that larger bears hold grip.

The dollar is likely to weaken further if Fed keeps its dovish stance, while any more aggressive than expected rhetoric from chief Powell, would offer fresh support to the greenback.

Res: 101.23; 101.37; 101.51; 101.71.
Sup: 100.75; 100.25; 100.00; 99.20.

USDJPY bulls took a breather after a constructive week, which saw the pair bouncing from a low of 137.23 to a high of 141.94.

The pair recouped half of July’s freefall, but the 20-day simple moving average (SMA) has been a struggle so far this week, pushing the price softly to the downside. Encouragingly, the 50-day SMA managed to limit losses around 140.80 along with the 23.6% Fibonacci retracement of the 127.21-145.00 uptrend but buying interest seems to be negligible at the moment.

The RSI is ready to re-enter the bearish area below 50 and the Stochastic oscillator is set to reverse lower after its peak in the overbought zone. Meanwhile, the MACD remains muted below zero despite climbing above its red signal line, all showing indecisiveness among traders ahead of today’s FOMC policy announcement.

If the price builds a base around the 50-day SMA or slightly lower at 140.15, where we can find the ascending line from March, it could re-examine the 20-day SMA at 141.34. A close above the latter may not excite traders unless the price crawls above the 142.00 mark too. A victory there could see a pause around 143.00 and then an advance towards the key 144.00-145.00 resistance zone. Breaching this wall, the bulls could post a new higher high within the 146.00-146.70 trendline area, while a more aggressive increase could reach the 1998 ceiling of 147.26-147.70.

In the bearish scenario, where the pair retreats below the 140.00 psychological mark, the spotlight will turn to the 138.55-138.00 support area. If that floor cracks, the decline could expand towards the 200-day SMA and the 50% Fibonacci of 136.11. Another failure at this point might prone a significant sell-off towards the 61.8% Fibonacci level of 134.00 and the tentative support trendline from January.

To sum up, USDJPY seems to have little backing to renew bullish pressure. A negative extension below 140.00 is expected to activate strong selling. Otherwise, the pair will need to claim the 142.00 barricade to continue higher. 

EUR/USD started a fresh decline below 1.1145. USD/JPY climbed higher above 141.00, but it might now correct gains in the near term.

Important Takeaways for EUR/USD and USD/JPY Analysis Today

• The Euro declined below the 1.1145 and 1.1095 support levels.
• There is a major bearish trend line forming with resistance near 1.1095 on the hourly chart of EUR/USD at FXOpen.
• USD/JPY climbed higher above the 140.00 and 141.35 levels.
• There is a key bearish trend line forming with resistance near 141.35 on the hourly chart at FXOpen.

EUR/USD Technical Analysis

On the hourly chart of EUR/USD at FXOpen, the pair started a fresh decline from the 1.1230 zone. The Euro declined below the 1.1140 support zone against the US Dollar.

The pair even settled below the 1.1095 zone and the 50-hour simple moving average. A low is formed near 1.1020, and the pair is now consolidating losses near the 23.6% Fib retracement level of the recent decline from the 1.1146 swing high to the 1.1020 low.

On the upside, the pair is now facing resistance near the 50-hour simple moving average at 1.1065. The next major resistance is near a bearish trend line at 1.1095.

The 50% Fib retracement level of the recent decline from the 1.1146 swing high to the 1.1020 low is also near 1.1095. An upside break above 1.1095 could set the pace for another increase. In the stated case, the pair might rise toward 1.1140.

If not, the pair might resume its decline. The first major support is near 1.1020. The next key support is near 1.1000. If there is a downside break below 1.1000, the pair could drop toward 1.0965. The main support on the EUR/USD chart is near 1.0920, below which the pair could start a major decline.

USD/JPY Technical Analysis

On the hourly chart of USD/JPY at FXOpen, the pair started a strong increase above the 140.00 resistance zone. The US Dollar gained bullish momentum above 141.00 against the Japanese Yen.

The pair tested the 142.00 zone, and a high was formed near 141.94. It is now correcting gains below the 50-hour simple moving average. USD/JPY is testing the 23.6% Fib retracement level of the upward move from the 137.68 swing low to the 141.94 high.

On the downside, the first major support is near 140.80. The next major support is near the 140.00 level or the 50% Fib retracement level of the upward move from the 137.68 swing low to the 141.94 high. If there is a close below 140.00, the pair could decline steadily.

In the stated case, the pair might drop toward 139.10. The next stop for the bears may perhaps be near the 138.00 pivot region.

Immediate resistance on the USD/JPY chart is near a bearish trend line at 141.35 and the 50-hour simple moving average. The first major resistance is near 142.00.

If there is a close above the 142.00 level and RSI moves above 60, the pair could rise toward 142.80. The next major resistance is near 143.50, above which the pair could test 144.00 in the coming days.

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NZDUSD is hovering a tad below the midpoint of the rectangle that has been in place since February 2023, as market participants have been unable to stage a sustained move up to now. However, since the failed late-May bearish breakout, a series of higher highs and higher lows has been in place with the bulls aiming for the next peak to occur above the July 14 high of 0.6411. Maybe, the continued convergence of the simple moving averages (SMAs) could play a role soon.

This delicate balance is reflected in most momentum indicators. The Average Directional Movement Index (ADX) remains in range-trading territory, and the RSI is hovering a tad above its 50-threshold. Similarly, the stochastic oscillator is trading sideways, very close to its midpoint. However, a bullish divergence appears to be forming since the latest higher low in NZDUSD has been met by a lower low in the stochastic.

Should the bulls feel more optimistic, they would try to keep the index above the 0.6170-0.6215 range and gradually test the resistance set by the 50% Fibonacci retracement of the April 5, 2022 – October 13, 2022 downtrend at 0.6272. If successful, they can then lead NZDUSD higher towards the upper boundary of the aforementioned rectangle at 0.6389.

On the other hand, the bears are keen on breaking the busy 0.6170-0.6215 range and then aim for another bearish breakout. However, they first have to overcome the May 31, 2023 upward trendline and the support set by the 0.6060-0.6092 range that is populated by the 38.2% Fibonacci retracement and the July 14, 2022 low respectively.

To conclude, market participants are in waiting mode ahead of this week’s key events. However, NZDUSD bulls might feel more confident on the back of the developing divergence.

• Current slowdown in inflationary growth has led to lower odds of another Fed Funds rate hike after today’s FOMC.
• Inflationary expectations measured by US breakeven inflation rates have started to tick higher since the end of May, in line with the 19% rally seen in WTI crude oil futures.
• If rising inflationary expectations are left unchecked, it may spiral into the real economy with a potential upside reversal in the lagging CPI data in the coming months.

The US Federal Reserve FOMC meeting will conclude later today where the interest rates futures market based on the CME FedWatch tool has priced in almost a 100% chance of a 25 basis points (bps) hike to bring the Fed Funds rate to 5.25% to 5.50%, and a 20% chance of another 25 bps hike for the Fed Funds rate to hit the terminal rate of 5.50% to 5.75% on the next FOMC meeting in September before the expected first rate cut to materialize in either May or June next year.

Today’s FOMC meeting will not release any new economic data and Fed Funds rate (dot plot) projections. Thus, Fed Chair Powell’s press conference will be closely watched for clues on the Fed’s current thinking on growth and inflation and how long it will maintain its current “higher interest rates for a longer period” guidance.

There was some form of “rejoice” in the last two weeks when the US and other developed nations’ consumer inflation rates for June grew at the slowest pace in almost two years. In contrast from a supply-side, and financial markets point of view, inflation may start to creep back up in Q4.

Inflationary expectations via breakeven rates have ticked higher since late May

Fig 1: WTI crude oil correlation with US 5-year & 10-year breakeven inflation rates as of 25 Jul 2023 (Source: TradingView, click to enlarge chart)

Based on data in the past five years, oil prices have had a significant direct correlation with inflationary expectations as measured by the tradable 5-year and 10-year US breakeven inflation rates derived from Treasury Inflation-Protected securities.

Since its 28 June 2023 low of US$67.05 per barrel, WTI crude oil futures have rallied by 19% to print a recent high of US$79.90 per barrel on Tues, 25 Jul which in turn led to a similar directional up move in the 5-year and 10-year US breakeven rates. The 10-year US breakeven rate rose to 2.39% on Tuesday, 25 July, that’s close to a four-month high.

Medium-term bullish breakout in WTI crude oil

Fig 2: WTI crude oil futures medium-term trend as of 26 Jul 2023 (Source: TradingView, click to enlarge chart)

From a technical analysis standpoint, the medium-term momentum of WTI crude oil futures has turned bullish with the clearance of the US$77.30 per barrel key intermediate resistance level and 200-day moving average. The next resistances stand at US$83.35 and US$92.70 per barrel which implies that inflationary expectations measured by the breakeven inflation rates in the US may tick higher in the coming months. Hence, if left unchecked, these reflexivity feedback loops inherent in financial markets may spiral into the real economy where lagging CPI data faces the risk of an upside reversal.

Therefore, watch Fed Chair Powell’s lips later on any mention of inflationary expectations.

On the hourly chart of GBP/USD at FXOpen, the pair found support near the 1.2815 zone. The British Pound even seems to be forming a base and attempting a recovery wave against the US Dollar.

The pair was able to clear a connecting bearish trend line with resistance at 1.2850 and the 50-hour simple moving average. It is now facing a hurdle near the 1.2900 zone. If there is a clear upside break above 1.2900, the pair could rise toward the 1.2960 level in the near term.

The next key resistance sits near the 1.3000 level, above which the GBP/USD pair might gain bullish momentum and revisit the 1.3050 zone.

On the downside, the first major support is near the 50-hour simple moving average at 1.2850. The next support is forming near the 1.2815 level, below which the pair might move lower toward 1.2750.

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