FX Watch: US dollar stabilises for now, AUD/JPY finding support from upward trendline

On hold for Fed’s rate decision

Today’s session will likely see market participants holding their breath ahead of the upcoming Federal Reserve (Fed) interest rate decision, with the paring of earlier gains overnight in Wall Street reflecting some reluctance to commit to any major moves. Ahead of the meeting, markets continue to lean into a 50 basis point (bp) cut (64% probability), with expectations little changed despite a positive surprise in both US retail sales and industrial production data overnight. The significant beat on both data fronts gave more weight to a potential soft landing and support the view that any Fed easing ahead is a policy normalisation move amid disinflation, rather than a reaction to recessionary risks.

If further validated by policymakers today, alongside a 50 bp cut, equities could potentially find further legs for its rally on little surprises. A 25 bp move, however, could disappoint by pointing to a longer timeline to bring rates back to neutral, with the need for market expectations to recalibrate to a less dovish Fed potentially a trigger for downside volatility. Much will of course revolve around how policymakers justify their decisions ahead as well, alongside focus on the dot plot and economic projections to gauge the scale and pace of rate easing ahead.

US dollar: Awaiting FOMC meeting for more cues

The US dollar has somewhat stabilised following its previous sell-off, as the build-up in net-short positioning for the US dollar reflected in the Commodity Futures Trading Commission (CFTC) data took a pause last week. For now, it can be argued that expectations for rate cuts ahead may be aggressive given the current economic resilience, with a cumulative 250 bp worth of rate cuts priced by the middle of next year. Any less-dovish pushback may be a catalyst for bearish sentiments to unwind, which could call for a near-term bounce to retest the 101.50 level.

However, greater conviction for buyers taking control may have to come from a firm move in its daily relative strength index (RSI) back above its mid-line, which it has thus far struggled to cross back above on at least two occasions since July this year. In the event the key psychological 100.00 level failed to hold, it may potentially pave the way for further downside in the US dollar towards its July 2023 low at the 99.12 level.

AUD/JPY: Holding above upward trendline support

Apart from the Fed, this week will also see the policy decision out from the Bank of Japan (BoJ). With the strength in the yen lately, policymakers sticking to their usual script of guiding for additional rate increases but offering little clues around its timeline could see some of the strength unwind. A look at the AUD/JPY shows the pair attempting to defend an upward trendline support around the 93.60 level, which may keep the broader upward trend intact. Of course, in the event the trendline is broken down, the long trade may be invalidated, which could pave the way for the pair to retest its 5 August 2024 low at the 90.24 level.