USD/JPY, FTSE 100 Forecast: Two trades to watch 080926

USD/JPY falls to six-month low as hawkish BoJ expectations rise

USD/JPY has dropped towards 153 on Tuesday, putting the yen at its strongest level since February. The pair has fallen around 4% in a matter of days from 160 only last week.

The yen has found strength as Japanese authorities spent a record $96.5 billion supporting the currency from July 30 to August 26. However, the gains in the yen have been maintained this time, owing to more hawkish Bank of Japan monetary policy expectations.

Traders are unwinding short yen positions from the carry trade amid expectations that the BoJ is turning more hawkish.

Data overnight saw Japan's Q2 GDP revised higher to an annualised 1.4%, boosted by stronger business investment. Real wages also rose 2.4% year-on-year in July, marking their biggest increase since May 2021 and the seventh straight monthly gain.

Stronger wages and growth suggest the economy has more room to absorb higher interest rates.

The market is pricing in a 98% probability that the BoJ will hike rates by 25 basis points next week to 1.25%, and is fully pricing in a further 25-basis-point hike by January, taking the rate to 1.5%.

Meanwhile, the U.S. dollar continued to digest August nonfarm payrolls, which rose by 162,000, well above the 55,000 forecast. Following the data, the market lifted expectations of a Fed rate hike next week to around 60%.

However, the U.S. dollar has not been supported by hawkish Fed expectations. Instead, the greenback is hovering around a two-week low as the yen carry trade unwinds.

Attention is turning to this week's PPI and CPI data for further clues over the Fed's next move. Worse-than-expected inflation data could lift Fed rate hike expectations, supporting the greenback and putting a floor under USD/JPY.

USD/JPY forecast – technical analysis

After running into resistance around the 160 level, USD/JPY has reversed lower, breaking aggressively through the 200 EMA and the 155.20 August low to support at 153.00. The RSI is now oversold, suggesting that a period of consolidation could be on the cards before further declines.

Sellers will look to break below 153.00 to bring the psychological 150.00 level into focus.

Buyers could be encouraged by the long lower wick, potentially a hammer reversal candle. Initial resistance is seen at 155.20, the August and May low. A move above this level would expose the 200 EMA at 159.00, followed by the 50 EMA, before attention turns to the 160.00 resistance zone.

A break above 160.00 would create a higher high, putting the pair on a firmer footing and improving the near-term outlook.

FTSE 100 modestly lower as commodity gains offset weakness in banks and consumer stocks

The FTSE 100 is opening modestly lower on Tuesday, as commodity-linked stocks offset weakness in banks and retailers.

Oil prices have jumped, with Brent climbing 1.7% to almost $100 a barrel, whilst WTI is up almost 3% to $95 a barrel amid increased hostilities in the Middle East.

Geopolitical tensions are elevated after Iran threatened to respond to U.S. economic warfare with a maritime exclusion zone across the Persian Gulf.

Concerns over energy supply have increased, with the risk premium on oil rising.

This is good news for energy stocks, with BP gaining 1.4%.

Elsewhere, copper was also rising to fresh record levels, helping heavyweight UK miners rise. Expectations that Washington could impose additional tariffs on refined copper have seen traders move supplies into the U.S., contributing to shortages elsewhere. Glencore, Anglo American, Antofagasta and Rio Tinto are rising.

A combination of surging energy prices and stronger industrial metals is supporting resource stocks on the London exchange. However, these same concerns that higher commodity costs will prolong inflation are preventing markets from making progress. As a result, banks are under pressure as stagflation fears rise.

Separately, UK British Retail Consortium figures showed that total retail sales grew 0.7% year-on-year, slowing from 1.3% in July.

FTSE 100 forecast – technical analysis

The FTSE continues to trade above its multi-month rising trend line, its 50 and 200 EMAs, maintaining a constructive outlook. However, the price has also formed a series of lower highs after running into resistance at the record high of 10,990, suggesting that momentum is slowing.

On the downside, immediate support can be seen around the 10,750 zone, with horizontal support, the 50 EMA and the rising trendline all converging here. A break below could see sellers gain traction towards 10,450.

On the upside, buyers would need to first retake 10,860, last week's high, and 10,900 in order to turn attention towards 10,990 and fresh record highs.