Pressure Remains on the Dollar as the Fed’s Minutes Suggest Cuts to Come

August so far has been an active month in markets after a weak NFP for July and changing expectations for the funds rate in the USA later this year. This article summarises recent American economic data and looks briefly at the charts of USDJPY and GBPUSD.

Last week’s release of inflation for July was more-or-less in line with expectations at 2.9%:

2.9% headline annual inflation is a significant milestone because it’s a low of more than three years. The Federal Reserve (‘the Fed’) certainly seems to have made significant progress and might even see the rate of inflation returning to 2% in less than a year. However, senior members of the Federal Open Market Committee (‘the FOMC’) insist that rates won’t be cut until there’s a sustainable and consistent decline by inflation.

For the moment, there’s no clear indication of a recession of any kind in the USA; growth is quite strong, certainly relative to expectations last year and in 2022:

GDP by itself is a lagging indicator which can’t signal future changes very well, but one would still expect to see the numbers moving down at least slightly compared to late 2022 and early 2023 if there was to be an imminent recession.

Of course, the situation can change quickly. Over the last several weeks expectations for a double cut and single by the Fed next month varied from close to equal to a significant majority for the latter. If upcoming data such as second estimate GDP or August’s job report are significantly divergent from the consensus, sentiment is likely to shift. There’s also the American presidential election to consider: with only a little more than two months to go, polls are likely to become more reliable although traders should have contingency plans in case of a surprise.

Dollar-yen, Daily

As in most other major pairs with the dollar, USDJPY has declined recently as it became clearer that the Fed is very likely to cut rates several times before the end of the year assuming the data continue to come in roughly as expected. For the yen, the situation with monetary policy is less clear: after a surprise hike last month, the Bank of Japan might continue to tighten later in the year, but that depends on how the Japanese economy is doing overall now that the immediate crisis of the yen’s weakness has abated somewhat.

¥150 is the obvious resistance here while the main technical reference is the 38.2% weekly Fibonacci extension around ¥146. Now there’s no more sign of saturation, with the slow stochastic very close to neutral and the price fairly far inside the lower deviation of Bollinger Bands. The 20 SMA is a possible dynamic resistance since the price hasn’t been able to break above there during the recent bounce.

The strong response by buyers on 5 August makes another significant leg down from here questionable. However, there also doesn’t seem to be much appetite to push the price strongly higher either. For now, a range between approximately ¥144 and ¥149 might persist.

Cable, Daily

The pound has performed well in most of its pairs in the last few weeks just as the dollar generally hasn’t done well. British manufacturing and service activity and productivity improved this month while inflation seems to be firmly under control, at least for now, at 2.2% last month.

The Bank of England (‘the BoE’) cut to 5% this month with the smallest possible majority of votes from the Monetary Policy Committee. Like the Fed, the BoE has deployed the rhetoric of sustainable and consistent inflation on target, so the next meeting on 19 September is critically important.

Cable certainly looks overextended with the slow stochastic and Bollinger Bands clearly signalling buying saturation. The price is about to complete seven consecutive up days, which is unusual for a major pair. $1.31 hasn’t been clearly broken yet so there might be a consolidation around this area if there’s no decline below the 0% weekly Fibonacci retracement. $1.309 from 21 August was the highest close for cable in 14 months, so usually it’d be unfavourable for traders to buy at such an extreme.

If there’s a retracement below the 0% Fibo, $1.30 would be the next obvious support which might spur buyers to action. A strong counter-trend reaction could give a good opportunity for daytraders to sell depending on the circumstances, but this doesn’t seem likely until 29 August’s American GDP.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.

This article was submitted by Michael Stark, an analyst at Exness.