FX Watch: US dollar firms, USD/JPY retesting crucial trendline support

Round-up

To start the new week, Asian markets have a calmer reaction to the attempted assassination of former President Donald Trump, while US futures drifted higher, as market participants assessed the overall impact to be limited. If anything, the event has further boosted the chances of Donald Trump’s re-election, as shown by online prediction market PredictIt.

The direct impact could be a firmer US dollar, as higher odds of a Trump’s presidency suggest that his inflationary policies in terms of stricter immigration, tougher trade ties and increased spending could potentially be set to pass. Safe-haven flows could be more limited, given the subdued moves around gold prices and a more calm showing in global markets. Markets may start to look beyond the incident this week, with attention refocused back on the US earnings season.

US dollar still struggling to cross back above upward trendline

The US dollar is attempting to find support from its 103.40 level, where previous reaction to this level in June this year was met with a near-term bounce. However, more assurances are still needed for the bulls, given that its daily relative strength index (RSI) has broken below the key mid-line at the start of the month, while its daily moving average convergence/divergence (MACD) has crossed into negative territory for the first time in two months. Both pointed to sellers in control for now, with bearish momentum in place.

Failure to defend its 103.40 level ahead may open the door for the US dollar to retest the 102.00 level next, where the next line of horizontal support stands. On the upside, buyers may have to reclaim the upward trendline to signal greater control.

USD/JPY on watch for any trendline breakdown

A weaker US dollar has dragged the USD/JPY to a key upward trendline support at around the 158.20 level, which will put the bulls to a crucial test. Intervention efforts by Japanese authorities seem to exacerbate the downside reaction to the pair amid the dovish takeaway from the recent US inflation data, which may drive some near-term caution.

Any breakdown of the trendline support ahead could be a cue of a wider trend reversal, which may leave the 154.60 level on watch next. For now, its daily RSI has dipped below its mid-line to the lowest level since March 2024 as a reflection of downside momentum. On the upside, the 160.23 level will be a heavy resistance level to overcome, having been met with potential intervention efforts on two occasions, which highlights Japanese authorities’ resolve in defending this level.