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• The CME FedWatch tool has suggested a total of 250 bps Fed funds rate cuts through September next year, to bring the Fed funds rate to 2.75%-3.00%.
• An upbeat BoJ’s monetary policy statement next Friday may trigger another round of JPY strength.
• Watch the key levels of 83.80 and 91.60 on the NZD/JPY.

Since our last publication, an equal-weighted basket of Japanese yen crosses Index that consists of the G-10 currencies (AUD, NZD, CAD, SEK, NOK, EUR, GBP, CHF, and USD) continued to tumble and recorded a week-to-date loss of -1.24% at this time of the writing. Also, it is just a whisker away of 1.5% from its key 5 August 2024 swing low.

NZD/JPY is the third worst-performing JPY cross pair

Fig 1: 3-month rolling performances of G-10 JPY crosses as of 13 Sep 2024 (Source: TradingView, click to enlarge chart)

The current leg of the Japanese yen crosses’ weakness has taken form since 2 September. Based on a three-month rolling performance basis as of 13 September, the NZD/JPY is ranked the third worst performer with a loss of 10.25% before USD/JPY (-10.26%), and NOK/JPY (-11.18%) (see Fig 1).

Key pivotal week ahead for global financial markets

Next Wednesday, 18 September, the US Federal Reserve is likely to kickstart its interest rate cut cycle after a pause of close to a year, and the expectations of 25 basis points (bps) cut on Fed funds rate to bring it lower to 5.00%-5.25% has already been fully priced in based on data from CME FedWatch tool.

Also, the aggregated probabilities calculation from the CME FedWatch tool suggests a likely 50 bps cut each for the next FOMC meeting on 11 November and 12 December to bring the Fed funds rate to 4.00%-4.25% before 2024 ends (a total of 125 bps cut).

In the upcoming year of 2025, another series of potential Fed funds rate cuts are expected to amount to 125 bps from January to September and the Fed funds rate may end at 2.75%-3.00% on the 17 September 2025 FOMC meeting; close to the 2.5% median long run projection pencilled in the previous “dot-plot” released on the June FOMC meeting.

The current pricing odds obtained from the CME FedWatch tool suggest that the 30-day Fed funds futures market is highlighting an increased risk of a recessionary environment in the US, and the Fed may be forced to respond with deeper cuts down the road.

Hence, Fed Chair Powell’s press conference and the latest “dot-plot” of Fed officials’ economic projections on growth, inflation, and Fed funds rate are likely to be scrutinized to decipher the Fed’s current view on the state of the US labour market and other economic growth-related variables such as consumer spending.

Any hints that indirectly point to softness in the US labour market may see another round of sell-off in the US dollar. In contrast, a stamp of “confidence” on the state of the US economy from Fed Chair Powell is likely to trigger some form of short covering on the US dollar where JPY weakness may resurface in the short term.

BoJ is on the horizon as well

Fig 2: Japan Citigroup Economic Surprise Index of 12 Sep 2024 (Source: MacroMicro, click to enlarge chart)

The Bank of Japan (BoJ) will set its monetary policy decision next Friday, 20 September after the release of the national-wide Japan inflation rate for August on the same day.

Japan’s core inflation rate (excluding fresh food) is expected to inch higher for the fourth consecutive month to 2.8% y/y in August from 2.7% in July.

Also, recent key economic data from Japan has improved (beat expectations on the average) in the past two weeks where the Citigroup Economic Surprise Index has jumped to 7.30 as of 12 September from -2.30 on 30 August, and it is on a steady path of uptrend since Jun 2024 low of -43.80 (see Fig 2).

The consensus forecast is no rate hike by BoJ next Friday but in its monetary policy statement, BoJ may take the opportunity to sound more upbeat on Japan’s economic growth prospects and a firmer inflationary trend in Japan and set the stage for another rate hike in either October or December to bring the overnight policy interest rate to 0.50%.

If such hawkish guidance from the BoJ materializes, the JPY may see another leg of strength which in turn led to more potential weakness in the JPY crosses.

Technical conditions in the NZD/JPY have deteriorated significantly

Fig 3: NZD/JPY medium-term & major trends as of 13 Sep 2024 (Source: TradingView, click to enlarge chart)

The long-term secular uptrend of the NZD/JPY has been damaged as price actions have retested and traded below the former long-term ascending trendline from the 19 March 2020 pandemic low and the 200-day moving average on 2 September 2024.

The daily RSI momentum indicator has continued to display a bearish momentum reading coupled with the 2-year yield spread of the New Zealand Government Bond and the Japanese Government Bond continued to slip to a new low at 3.5%, below the 5 August print of 3.84% which suggests the attractiveness to use the Japanese yen as a funding currency to invest in New Zealand Government Bonds have been reduced (see Fig 3).

These observations suggest the NZD/JPY may be undergoing a multi-month medium-term downtrend phase. A break below the 83.80 key intermediate support exposes the next medium-term support at 81.00 in the first step.

However, a clearance above 91.60 key medium-term pivotal resistance invalidates the bearish scenario for the next medium-term resistance to come in at 95.40.

A quick change in sentiment pushed the dollar index price to the lowest of the week in European trading on Friday, after it hit weekly high on Thursday afternoon, just ahead the US data which deflated the dollar.

The price action has been in a sideways mode in past couple of weeks and moving above new one-year low and 200WMA, as markets await Fed policy meeting next week to get more clues about dollar’s direction.

The Fed is likely to start cutting interest rates in its monetary policy meeting next week, but it is still unclear what will be the size of rate cut as bets for either cut (25 or 50 basis points) continue to rise and decline, according to incoming economic data.

The dollar is expected to fall if US policymakers opt for more aggressive scenario, with violation of pivotal supports at 100.30/00 (200WMA / psychological) to expose targets at 99.20/98.92 (17 July 2023 low / Fibo 61.8% of 89.15/114.72 uptrend).

On the other hand, the currency may rise if the central bank disappoint markets by decision for 25 basis points rate cut however, sustained break above the top of recent range (101.85) will be required to bring bulls back to play.

Res: 101.22; 101.50; 101.86; 102.21.
Sup: 100.86 100.49; 100.30; 100.00.

USDJPY remains firmly in red and cracked pivotal Fibo level at 140.48 (61.8% retracement of 127.22/161.95), the upper boundary of 140.48/00 key support zone, after renewed weakness in past two days fully offset positive signal from Wednesday’s long-tailed daily candlestick.

The pair is on track for another weekly loss, with long upper shadow on weekly candlestick, pointing to strong offers and adding to downside prospects.

Technical picture on daily chart is firmly bearish (strong negative momentum / price weighed by descending daily Ichimoku cloud / MA’s in bearish setup with formation of 55/200DMA death-cross, reinforcing negative outlook).

Firm break of 140.48/40 pivots will be increasingly bearish and risk extension towards 137.23 trough (July 2023 low).

Falling 10DMA (143.22) should cap extended upticks and keep larger bears intact.

Res: 141.68; 142.08; 143.04; 143.22.
Sup: 140.25; 140.00; 138.60; 137.23.

The euro has extended its gains on Friday. EUR/USD is trading at 1.1091 in the European session at the time of writing, up 0.13% today. The euro has climbed 0.7% since the ECB’s rate cut on Thursday.

ECB lowers rates to 3.5%

The European Central Bank delivered as expected on Thursday, trimming the key interest rate by 25 basis points to 3.5%. This was the second rate cut in the current rate-lowering cycle, as the ECB responded to falling inflation and a deteriorating eurozone economy.

The war against inflation is largely won, which enabled the ECB to deliver the rate cut. Inflation in the eurozone has dropped to 2.2%, close to the target of 2%. The ECB updated inflation forecast was unchanged from June, with inflation expected to average 2.5% in 2024 and 2.2% in 2025

At a press conference, ECB President Lagarde reiterated that rate decisions would be made “meeting by meeting” based on economic data, essentially ditching forward guidance. Lagarde sounded somewhat hawkish, noting that wage growth remains high and the labor market is still resilient. The ECB is being cautious and has signaled it will take a slow approach to further cuts and the markets are looking at a cut in December. If economic conditions suddenly worsen, the central bank would have to consider a rate cut next month.

The Federal Reserve meets next week and rate cut odds continue to swing wildly. The US producer price index eased to 1.7% y/y in August, down from a downwardly revised 2.1% in July and below the market estimate of 1.8%. This sent the odds of a half-point cut soaring to 41%, up from just 13% yesterday, according the CME’s FedWatch. The Fed meeting is live, with plenty of uncertainty as whether the Fed will cut by 25 or 50 basis points.

EUR/USD Technical

• EUR/USD faces resistance at 1.1099 and 1.1123
• There is support at 1.1052 and 1.1028

Gold finally broke to the upside yesterday, moving sharply through the 2529 level and out of the consolidation we've been tracking in wave four for the last two weeks. So far, we’re seeing a nice extension to the upside, which suggests that wave five is in progress. However, it should be subdivided into five sub-waves before we can call an end to the uptrend. Ideally, we’ll see another leg higher after the next fourth- subwave retracement, with 2590 to 2600 as the next upside projection and potentially strong resistance for the entire fifth wave.

If you're looking to join the trend here, keep in mind that it might be a bit late, especially since moves out of a triangle are final in a higher degree sequnce, and that market is ready to turn, when least expected.

Drop back below 2529 will signal for a top.

• GBPJPY resumes negative momentum, but hopes for a pivot remain
• Sellers need a close below 185.65 to take full control

GBPJPY came under renewed downside pressure after closing Thursday’s session with mild gains around 186.00.

The pair shifted from a recent low of 183.70 earlier this week, forming a hammer candlestick and giving hope for a potential upward reversal. If the bears manage to close below 185.00-185.65 today, the candlestick pattern may not be a reliable signal despite the RSI and stochastic oscillator being near oversold levels.

A continuation lower could retest August’s base of 183.00, while slightly beneath that, the price could meet the support trendline, which joins the lows from 2022 and 2024 at 182.00. Breaking that floor too, the sell-off could pick up steam towards the 180 psychological level or closer to the extension of the ascending trendline last seen in Q1 2023 at 179.00.

To improve the short-term outlook above September’s high of 193.46, the bulls will have to put in a lot of effort. The 20-day exponential moving average (EMA) could be the first obstacle near 188.20. Then, some congestion might occur around 189.84, where the 61.8% Fibonacci retracement of the 2024 uptrend is placed. Further up, the door will open for the 50- and 200-day EMAs currently seen around 191.64.

Overall, GBPJPY has not escaped downside risks, though it could postpone any further selling if it manages to close above 185.00-185.65 once again. 

As shown by the XAU/USD chart:

→ Gold has reached a new all-time high;

→ This morning, gold is trading around $2,567 per ounce.

Bullish sentiment is being driven by expectations of a Federal Reserve rate cut next week. According to MoneyControl, the International Monetary Fund stated on Thursday that it would be "appropriate" for the Fed to start its long-awaited monetary easing cycle at its meeting next week, as inflation risks have eased.

On 6 September, we analysed the gold price chart and identified:

→ an ascending channel (shown in blue);

→ two resistance lines forming a “bullish flag” pattern.

Gold’s surge to a new all-time high has broken through the “bullish flag,” suggesting a potential resumption of the rally. How successful could this be?

Technical analysis of the XAU/USD chart today shows that the price is approaching resistance levels formed by:

→ the upper boundary of the blue channel;

→ Resistance line 3, which can be viewed as the target following the breakout of resistances 1 and 2, according to technical analysis principles.

Therefore, gold has limited potential for further growth due to the proximity of these resistance levels. It's worth noting that the RSI is in the overbought zone, which could encourage bulls to take profits at this historic peak.

Given these factors, the market may be vulnerable to a correction. However, the key influence will be the actual decision from the Fed, which will be announced next Wednesday.

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Yesterday, the European Central Bank’s Governing Council cut the refinancing rate, as expected, from 4.25% to 3.65%.

The ECB also stated that monetary policy would remain sufficiently restrictive "for as long as necessary" to ensure inflation returns to its medium-term target of 2%.

Financial markets responded with:

→ A strengthening of the euro. EUR/USD rose by more than 0.5% after the rate cut announcement.

→ A rise in European stock market indices.

For example, Germany's DAX 40 index (Germany 40 mini on FXOpen) received a bullish boost, which supports more optimistic conclusions in today's technical analysis:

→ Price movement fits within the ascending channel shown in blue.

→ The thickened line highlights that the median of the channel repeatedly acted as support before early August. As indicated by the arrow, it regained this role after the sharp decline on 5 August.

→ The linear regression channel (shown in purple) points to upward momentum.

Investors may feel optimistic, expecting that this autumn demand forces could lift the DAX 40 (Germany 40 mini on FXOpen) towards the upper boundary of the channel.

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This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Eurozone industrial production fell by -0.3% mom in July, missing expectations of 0.2% mom rise. The decline was driven by significant drops in production across key sectors: intermediate goods fell by -1.3%, capital goods by -1.6%, and durable consumer goods by -2.8%. On the positive side, energy production saw a slight increase of 0.3%, while non-durable consumer goods rose by 1.8%.

In the broader EU, industrial production slipped by -0.1% momh. Notably, Malta (-5.5%), Estonia (-4.8%), and Romania (-3.4%) reported the largest production declines. Conversely, Ireland led gains with a robust +9.2% increase, followed by Croatia at +8.0% and Belgium at +7.3%.

Full Eurozone industrial production release here.

ECB officials shared varied perspectives on the economic outlook and monetary policy today, following yesterday’s 25bps rate cut. This move was largely anticipated as ECB continues its cautious approach to address both inflation and slowing growth.

ECB Deputy Governor Olli Rehn highlighted the "good reasons" behind the rate cut, amid declining inflation. He also stressed that "current uncertainties further emphasize the dependence on fresh data and analysis" to guide policy decisions.

Bundesbank President Joachim Nagel, another member of the Governing Council, struck a positive tone, stating, "We assume that core inflation will improve, especially with the declining wage trend in the eurozone." He added that in Germany, "things are moving in the right direction."

Meanwhile, Bank of France President François Villeroy de Galhau acknowledged the challenges posed by weaker-than-expected activity data, particularly in France. However, he maintained a cautious outlook, noting the potential for "a very gradual recovery" beyond the short-term boost from the Olympics. He emphasized that the pace of monetary easing "has to be highly pragmatic" and that ECB "keeps full optionality" for future meetings.

Bank of Slovenia President Bostjan Vasle reiterated ECB's data-dependent approach, adding that "we are not committed to any predetermined rate path," with inflation still largely driven by core components and services.

Bank of Estonia Governor Madis Muller, echoing these views, expressed concerns over services inflation but noted growing confidence in the broader inflation outlook, despite expectations of a temporary acceleration.