Gold, USD/JPY outlook hinges on Fed, BoJ rate decisions

Gold rose more than 1% to reach its highest level since early June, lifted by falling bond yields. The metal was testing a key resistance level after today’s weaker US retail sales and manufacturing data helped to reinforce expectations that July could mark the last Fed rate hike in this cycle, following weaker inflation figures last week. Falling yields are also helping to keep the USD/JPY outlook finely balanced, with the pair testing a key technical level around 138.00 ahead of a busy week of monetary policy decisions next week from the Fed, ECB and BoJ.

Dollar mixed as retail sales and industrial production miss expectations

The US dollar was all over the place in a quiet trade this morning, rising against antipodean currencies and falling against the likes of the euro, pound and yen. After the weaker retail sales and manufacturing production data, we saw the greenback weaken against currencies it was outperforming against earlier.

Retail sales grew less than expected in June, up 0.2% on both the headline and core fronts. Expectations were for gains of 0.5 and 0.4 percent respectively. With industrial production also falling 0.5% month-on-month, and inflation showing encouraging signs last week, the Federal Reserve is now expected to hike interest rates just one final time before going on a pause.

The question is whether the US dollar will fall significantly further ahead of that rate decision following its big falls last week. If it doesn’t then the USD/JPY could cling onto this key support area until the FOMC day:

Source: TradingView.com

USD/JPY outlook: Will BoJ tweak yield curve control policy again?

Meanwhile there’s speculation the Bank of Japan could adjust its yield curve control policy further next week after comments from deputy governor Shinichi Uchida. The BoJ intervenes by holding down yields on benchmark 10-year Japanese government bonds within 0.5% above or below zero, in an effort to sustainably achieve 2% inflation. The BoJ introduced that policy 7 years ago and since March 2021 it has amended it twice -- widening the band to 0.25% either side of zero, before doubling it in December 2022 to 0.5% as other global central banks tightened their policies aggressively. But now that most other banks are at or near the peak in terms of interest rates, any policy adjustments from the BoJ will be viewed as the steppingstone to policy normalisation.

However, the BoJ Governor Kazuo Ueda on Tuesday said there was still some distance to sustainably and stably achieving the central bank's 2% inflation target. In other words, the central bank’s ultra-loose monetary policy will be with us for a long time still.

Therefore, while the short-term USD/JPY outlook is uncertain, the long-term direction is still to the upside as the BoJ will not be in a rush to normalise policy.

In the short-term, the USD/JPY could be heading down to 135.00 if key support range around 137.00 to 138.00 breaks down. Here, we have prior support and resistance converge with the bullish trend line and the 200-day average. However, if support holds firm, then a move back to 140.00 would be the first objective for the bulls.

Gold outlook: Metal arrives at key level

The recent gains for gold have been triggered by the US dollar falling sharply last week amid expectations that the Federal Reserve is close to reaching the end of its rate hiking cycle, after both CPI and PPI measures of inflation came in weaker than expected. Today’s weaker retail sales and industrial production data further fuelled those expectations, causing yields to fall, which in turn helped to support low- and zero-yielding assets, like gold and silver.

Gold has now reached a key technical area around $1980/85, where it had previously found support and resistance. The bulls will need to see gold clear this level on a closing basis if they want to see $2K+ again.

Source: TradingView.com

The gold outlook could brighten further if the Fed signals a pause next week.

What to look out for the rest of the week

The start of this week has been very quiet after a more volatile-than-usual start to the summer months. The lack of major top-tier news from the US and Europe means traders are largely sitting on their hands, especially with the Fed also entering a blackout period ahead of next week’s FOMC meeting. Still, we have a handful of potentially market-moving data to look forward to this week. CPI reports from New Zealand and the UK will be released on Wednesday, while Australian jobs report will be monitored closely by those speculating on the AUD on Thursday. From the US, we will have housing starts and permits on Wednesday, followed by jobless claims, Philly Fed Manufacturing index and existing home sales on Thursday. But with much bigger events taking place next week, don’t expect any wild swings on the back of these figures.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R