Forex Market Update: Dollar Holds Steady, Yen Weakens, Sterling Strengthens
Last week, the US Dollar closed on a slightly weaker note following the Federal Reserve’s decision to cut interest rates by 50 basis points. While the greenback lost ground against most major currencies, its decline was relatively modest. Notably, the Dollar managed to close higher against the Japanese Yen and Swiss Franc, and it continued to hold above key support levels against the Euro. The US stock market reached new record highs, but the rally lacked its usual enthusiasm, reflecting a somewhat cautious market sentiment. This, along with a rebound in US treasury yields, helped ease significant selling pressure on the Dollar.
The Japanese Yen saw a more pronounced weakness, largely due to the cautious stance taken by the Bank of Japan (BoJ), indicating no rush to raise interest rates in the near future. This sentiment, combined with surging bond yields in the US and Europe, weighed heavily on the Yen. From a technical perspective, the Yen’s short-term rebound seems to have ended, setting the currency on a path of fresh decline.
In contrast, the British Pound emerged as one of the strongest performers, supported by robust UK economic data and a more hawkish outcome from the Bank of England (BoE) meeting. The Pound broke through key resistance levels against the Euro and Swiss Franc, solidifying its position as one of the top gainers with further upside potential.
For the week overall, the Japanese Yen lagged behind, followed by the Swiss Franc and the US Dollar. On the other hand, the Australian Dollar emerged as the best performer, with the Pound closely following. The New Zealand Dollar also showed strength, rounding out the top three. The Euro and Canadian Dollar had a more neutral performance, positioning themselves in the middle of the pack.
DOW and S&P 500 Break Records after Fed, Yet Market Rally Lacks Usual Excitement
Following the Federal Reserve’s 50 basis points rate cut last week, the US markets responded with measured gains as the DOW and S&P 500 climbed to fresh record highs. However, the market rally lacked the typical enthusiasm seen after major policy shifts. This tempered reaction can be attributed to the fact that much of the rate cut had already been anticipated and priced in the prior week, fueled by growing speculation. Attention has now turned to the uncertainty surrounding the Fed’s next moves.
The updated dot plot from the Federal Open Market Committee (FOMC) revealed a nearly even split among members. While ten members signaled the possibility of an additional 50 basis points cut by the end of the year, nine leaned towards a more cautious 25 basis points reduction. The futures market reflects a different sentiment, with a 51.4% probability of a 50 basis points cut in November and a 74.2% likelihood of a total 75 basis points reduction by year-end. This divergence underscores the market’s uncertainty, making it challenging to predict the Fed’s future actions.
The Federal Reserve’s path forward will depend largely on upcoming economic data. A significant drop in inflation or a marked deterioration in labor market conditions could prompt a more aggressive cut. However, a weakening job market could reignite fears of an economic slowdown, raising concerns of a recession, which would likely unsettle investors.
The looming US presidential election in November adds another layer of uncertainty to the markets. Many investors may opt to hold off on significant moves until there is more clarity regarding the election outcome, keeping the markets cautious in the months ahead.
From a technical perspective, the DOW faces significant resistance at the 61.8% projection level, with the outlook remaining bullish as long as the 55-day Exponential Moving Average (EMA) holds. A decisive break above the resistance level could pave the way for further gains.
US 10-Year Yield Stabilizes into Range Trading, Dollar Index Lacks Strong Downward Momentum
The US 10-year yield saw a rebound last week, bringing the D MACD back above the signal line. With bullish convergence conditions, a short-term bottom may be in place, though upside potential may be limited by resistance levels.
On the downside, a fall through support levels could see a rebound. For the 10-year yield to break through key levels, a significant policy shift by the Federal Reserve towards continuous aggressive rate cuts may be necessary.
While the Dollar Index has shown weakness, there is a lack of clear downward momentum. EUR/USD’s struggle to break out of its range has contributed to the Dollar Index’s stabilization. The rebound in USD/JPY also supports the Dollar Index.
The near-term outlook for the Dollar Index remains bearish, with resistance levels holding for now. However, the speed of the decline will depend on overall developments in risk sentiment and treasury yields.
BoJ’s Cautious Tone Drags Yen Lower, Lifts Nikkei
The Japanese Yen ended last week as the weakest currency, driven by surging bond yields in the US and Europe, coupled with a cautious tone from the Bank of Japan (BoJ). While the decision to keep interest rates unchanged was expected, BoJ Governor Kazuo Ueda’s post-meeting remarks left markets somewhat disappointed, with some interpreting them as slightly dovish. This development weighed on the Yen and spurred a strong rebound in Japan’s Nikkei index.
Governor Ueda reaffirmed the possibility of rate hikes if economic conditions align with the BoJ’s projections. However, he highlighted uncertainties in the global economy, particularly regarding the US. Ueda also noted that inflationary pressures from the Yen’s weakness were fading, giving the BoJ room to consider its next moves. Overall, the message conveyed that the BoJ is not in a rush to raise interest rates this year.
Nikkei’s rally last week, along with the break of key levels, suggests that the pullback may have completed, with further upside potential. The rise in the Nikkei could extend to higher levels, with corresponding impacts on Yen crosses.
In a similar vein, NZD/JPY’s rebound from lower levels indicates a potential resumption of the upward trend. Continued breakouts and sustained trading could see NZD/JPY targeting higher levels in the near term.
GBP Breaks Key Levels on Strong UK Data and Hawkish BoE
The British Pound was one of the top performers last week, breaking through key resistance levels against the Euro and Swiss Franc. The Pound’s momentum was driven by robust UK economic data and a more hawkish outcome from the Bank of England (BoE) meeting.
While the decision to hold rates was expected, the surprise came with an unexpected vote from Deputy Governor Dave Ramsden in favor of holding rates. The BoE’s statement emphasized a gradual approach to easing, citing elevated services inflation. While a rate cut in November is still a possibility, it is no longer a certainty after last week’s developments.
UK inflation data indicated persistent price pressures, with core CPI rising more than expected and retail sales showing strong growth. These figures suggest continued demand despite high interest rates, keeping inflation risks elevated.
From a technical perspective, GBP/CHF’s break of key resistance levels confirms a resumption of the rebound, with further bullish potential. The medium-term outlook remains positive, with the potential for a corrective move targeting higher levels.
EUR/GBP’s downward trend may resume, with lower targets in the near term. The medium-term outlook remains bearish, with potential downside acceleration towards key support levels.
AUD/USD Weekly Report
AUD/USD’s rally from previous lows resumed last week, with further upside potential. The overall bias remains on the upside, with key resistance levels in focus for potential targets. While minor support levels may provide temporary resistance, the outlook remains bullish as long as key support levels hold.
In the bigger picture, price actions suggest a medium-term corrective pattern, with the potential for further gains. Firm breaks of resistance zones could see AUD/USD targeting higher levels. Strong support levels are expected in case of a retreat.
In the long term, the downtrend from previous highs may have completed, with potential for a trend reversal in the future. Deeper declines may find strong support for a potential rebound.
Overall, the forex market saw a mix of movements last week, with the US Dollar holding steady, the Japanese Yen weakening, and the British Pound strengthening. While uncertainties loom over the markets, upcoming economic data and policy decisions will likely shape the currency movements in the coming weeks.
