FX Watch: US dollar back at 200-day MA, USD/JPY nearing resistance confluence

US economic resilience supports a less dovish Fed rate path

Following three straight months of upside surprises in US retail sales, the September data release overnight added to the fourth. US consumers continue to reflect strong resolve in spending, with headline retail sales outperforming estimates at 0.4% (est 0.3%), while the core read crushed expectations at 0.5% (est 0.1%). With consumer spending accounting for about 65 - 70% of the US gross domestic product (GDP), the Atlanta Federal Reserve (Fed) GDPNow now sees Q3 GDP growth at 3.4% rate, up from previous 3.1%.

Coupled with the recent blowout job report and higher-than-expected consumer inflation data, the recent trend of upside economic surprises made the Fed’s 50 basis point (bp) in September looks like an overreaction. Policymakers will likely have to tread carefully in its rate-easing path ahead to avoid an inflation resurgence, with economic data leaning more and more towards putting the easing process on pause. For now, steps of 25 bp cuts over the next few meetings remain anchored as the market consensus, but another blowout jobs data for November could likely challenge that.

US dollar index: back to retest its 200-day MA

The significant beat in US retail sales saw US Treasury yields edge higher, giving the US dollar further reason to extend its gains overnight. This brought the US dollar back to retest its 200-day moving average (MA), which may offer some near-term resistance, along with its overbought technical conditions on the daily relative strength index (RSI). Nevertheless, any dips may leave the formation of any higher low on watch, with support to watch at the 102.30 level where an upward support trendline stands.

USD/JPY: resistance confluence at the 151.95 level on watch

A close to 7% rally in the USD/JPY over the past month has left the pair just 1.3% away from a key resistance confluence at the 151.95 level. This is where an upward trendline may serve as a hurdle to overcome, coupled with its 200-day MA and a horizontal resistance. The next Bank of Japan (BoJ) meeting will be held on 30 - 31 October. While policy settings are unlikely to change in the upcoming meeting, market expectations are for another rate hike in December. Key focus will be on whether policymakers will lay the groundwork for a December move, with any indication of upcoming hikes likely to bring some hawkishness back on the table following policymakers’ previous cautious tone.