USDJPY stays pressured at three-week low on dovish Fed bias

Early Monday, the market feels somewhat positive, though there's a cautious mood ahead of key US events later this week that could impact trading. Fed Chair Jerome Powell's recent dovish stance has weakened the US Dollar, which has helped stocks stay strong due to expectations of lower interest rates and optimistic growth. However, the bond market looks uncertain, and the UK’s holiday is also dampening the mood and supporting the US Dollar.

The US Dollar Index is at its lowest in 13 months, causing the EURUSD to stay high, the GBPUSD to remain strong, and the USDJPY to hit a three-week low. The AUDUSD and NZDUSD have retreated from their recent highs as traders worry about how the Reserve Bank of Australia and the Reserve Bank of New Zealand will manage their policies with mixed economic signals. Meanwhile, the USDCAD has stabilized after a significant drop, boosted by the recovery in Crude Oil prices.

Concerns about Gaza and expectations of economic growth are helping Crude Oil recover from recent losses, and Gold prices remain steady after hitting an all-time high last week. Bitcoin and Ethereum have pulled back after a significant jump, though they benefited from Powell's dovish comments and hopes for supportive Republican leadership in the US.

Following are the latest moves of the key assets:

• WTI Crude oil rises for the third consecutive day as buyers attack $75.50 by the press time.
• Gold extends Friday’s recovery toward the all-time high marked last week, mildly bid near $2,520 as we write.
• The USD Index licks its wounds at the lowest level since July 2023, making rounds to 100.70 at the latest.
• Wall Street closed in the green but the Asia-Pacific shares trade mixed. That said, equities in Britain and Europe lack clear directions during the initial trading hour.
• BTCUSD and ETHUSD both print mild losses to pare the previous weekly gains around $63,800 and $2,750 respectively at the latest.

US Dollar bears look to Fed Inflation for further dominance…

On Friday, Fed Chairman Jerome Powell’s speech at Jackson Hole was notably dovish. He emphasized the Fed’s commitment to supporting the labor market, which increased expectations for rate cuts and led to a drop in the US Dollar Index to its lowest level of the year.

Despite this, the US Dollar found some support due to differing expectations between the equity and bond markets, especially with upcoming data on the US Core PCE Price Index, which is a key inflation measure for the Fed.

The EURUSD didn’t fully benefit from Powell's comments, even as expectations for rate cuts from the Fed exceeded those for the European Central Bank. ECB official Olli Rehn’s remarks about weaker European growth compared to the US, and uncertainty about a potential rate cut in September, also weighed on the Euro.

Bank of England Governor Andrew Bailey tempered expectations for significant rate cuts, which helped the GBPUSD reach a multi-month high amid the weaker US Dollar.

The USDJPY is showing some resistance to decline, despite mixed market sentiment. Positive data from Japan and the IMF’s praise for the Bank of Japan’s rate hikes keep the Yen buyers hopeful, even with lower yields.

The AUDUSD, NZDUSD, and USDCAD are benefiting from stronger commodity prices and a weaker US Dollar, though concerns about potential rate cuts from the Reserve Bank of Australia, Reserve Bank of New Zealand, and Bank of Canada are limiting their movements.

In the energy markets, rising crude oil prices are driven by the end of Gaza peace talks, Israel’s aggressive stance, and Iran’s potential response, along with reduced crude oil inventories. However, uncertainties about future OPEC+ output policies are affecting oil buyers.

Gold has become a popular choice for traders seeking safety amidst economic uncertainty, with its price boosted by the weaker US Dollar and lower yields.

• Strong buy: USDCAD, USDJPY, US Dollar, Silver
• Strong sell: AUDUSD, NZDUSD, GBPUSD
• Buy: BTCUSD, ETHUSD, Nasdaq, Gold, DJI30, USDCNH
• Sell: DAX, FTSE 100, EURUSD, Crude Oil

UK Holiday, light calendar to offer softer start to the key week…

Looking ahead, Germany’s IFO Sentiment data for August and the US Durable Goods Orders for July will be important for traders. However, the UK’s bank holiday and a light economic calendar elsewhere, combined with cautious anticipation of Tuesday’s US Consumer Confidence data and Friday’s US Core PCE Price Index (the Fed’s preferred inflation measure), might limit market activity.

Given the current bearish trend of the US Dollar, any new data is expected to confirm further rate cuts from the Fed. A positive surprise in the data could lead to a rebound in the US Dollar. Despite this, the overall dovish stance of the Fed is likely to keep the US Dollar weak and support commodities, as well as other major currencies and currencies from Australia and New Zealand.

May the trading luck be with you!