FX Watch: US dollar struggled amid dovish Fed, USD/JPY back at key trendline support

Round-up

The case for a September rate cut was cemented by the US Federal Reserve (Fed) overnight, with Fed Chair Jerome Powell offering himself some policy flexibility by laying out the condition that inflation data continues to be “encouraging” ahead. Tints of dovishness were found in his comments that inflation and labour data continue to move into better balance and more good data would further strengthen their confidence.

The hopes of impending monetary policy easing, along with revived traction into artificial intelligence (AI) stocks, were sufficient to fuel a 3% gain in the Nasdaq 100 index. Chip stocks were the clear outrunners, with Nvidia recovering 12.8% overnight, AMD was up 4.4% and Broadcom was up 12.0%. Thus far, corporate earnings have been delivering as well, which helped to support views of a continuation of the broader upward trend in the major indices.

US dollar struggled amid lower Treasury yields

A dip in US Treasury yields amid a dovish Fed has dragged the US dollar to its lowest level in almost two weeks. While dip buyers are attempting to hold an upward trendline support, earlier bounces from the trendline have been short-lived as a peak in the US interest rate environment is very much in sight. For now, its daily relative strength index (RSI) has found some resistance at its mid-line lately, which denotes a weaker showing from buyers.

Any move below its July low at the 103.40 level will likely pave the way for the US dollar to retest the 102.00 level next. On the upside, any near-term bounce may find resistance at the 105.60 level, which has capped the US dollar on two previous occasions.

USD/JPY back at primary trendline support

Recent guidance from the Bank of Japan (BoJ) seems to open the door for further normalisation ahead, which kept the US-Japan policy divergence in play. With that, narrowing bond yield differentials has offered a headwind for USD/JPY bulls to address, as the attractiveness in the once-favoured carry trade continue to fade.

The USD/JPY has retraced as much as 8% over the past three weeks, but some attempt to stabilise may be in sight. This comes as the pair found some dip-buying at a primary upward trendline support around the 148.60 level, while technical conditions trade at extreme oversold levels, which called for some calm. Any bounce may potentially find immediate resistance at the 151.95 level, where a 23.6% Fibonacci retracement level stands from its recent dip.