The US dollar weakened despite three Fed officials dissenting in favour of a rate hike, as traders pushed back expectations for a second tightening cycle. With the Federal Reserve now behind us, attention turns to the Bank of Japan, where guidance rather than rates is expected to drive the next move for USD/JPY and GBP/JPY.
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Fed Dissent Fails to Lift the US Dollar
The Fed held its interest rate target at 3.5%–3.75%, although three members dissented and called for a 25bp hike. Still, the US dollar was broadly lower as the meeting was not deemed as hawkish as many had expected. Fed funds futures still favour a September hike, although the implied timing of a second hike has been pushed back from December to March, with a probability of just 36.2%.
Given Waller said that "inflation remains elevated relative to the Committee's 2% inflation goal", a September hike seems likely unless incoming employment and inflation data weaken sufficiently. That seems unlikely. However, hikes beyond September remain uncertain and will likely hinge on inflation expectations, particularly if crude oil prices continue to rise on Middle East headlines. It is this uncertainty surrounding a second Fed hike that weighed on the US dollar, sending EUR/USD up 0.7%, GBP/USD up 0.5%, and USD/CHF down 0.7%.
Source: LSEG
BOJ Guidance Could Drive the Next Move in USD/JPY
Focus now shifts to tomorrow's BOJ meeting, where policymakers are widely expected to leave the policy rate unchanged after raising it to 1.0% in June. With markets seeing little chance of another hike this week, the focus will instead be on forward guidance, whether the BOJ upgrades its growth outlook, and whether it continues to view inflation risks as skewed to the upside.
The lack of a hawkish surprise remains the most likely outcome, which could weigh on the Japanese yen. That would favour GBP/JPY and USD/JPY bulls, particularly given the strong uptrends already in place.
That said, traders should always be on guard for a surprise when the BOJ is involved, as it has a long history of catching markets off guard. A hawkish twist—whether through stronger guidance or upgraded forecasts—could send the Japanese yen sharply higher, driving pairs such as GBP/JPY and USD/JPY markedly lower.
GBP/JPY Technical Analysis: British Pound vs Japanese Yen
It is not often we see such a textbook trend on a forex market like we’re witnessing on GBP/JPY. Currency markets have a tendency to move aggressively between levels – like an elevator at a shopping mall. Whereas the price action on GBP/JPY is more akin to a nicely trending stock.
The rally from the June low to July high has since witnessed a timely and shallow retracement. The overlapping nature of the daily candles to me suggests is a simple correction, and Thursday’s bullish engulfing candle around the 20-day EMA suggests that correction may now be complete. The daily close above the weekly R2 pivot (217.92) is also constructive to the near-term bullish bias, which remains in play until prices break beneath Friday’s bullish engulfing low.
The July high, 220 handle and weekly R3 pivot provide a potential resistance zone for bulls over the near term. While a break beneath yesterday’s low brings the weekly R1 pivot, last week’s VPOC and the 216.26 low into focus.
Source: ICE, TradingView
USD/JPY Technical Analysis: US Dollar vs Japanese Yen
Clearly, we have another strong bullish trend on USD/JPY, though its price action is not as convincing for bulls over the near term. Prices are arguably stretched from the 20-day EMA after USD/JPY met resistance around the monthly R1 and 164 handle.
The 4-hour chart shows strong volume on the most recent candle, amid the post-FOMC US dollar selloff. If prices continue to retrace lower over the near term, bulls may be seeking evidence of support around the 163 handle, July high (162.85) or 20-day EMA (162.73). Therefore, patience may be required before assuming the swing low is in during a weak US dollar environment.
Source: ICE, TradingView
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-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
