FX Watch: US dollar dipped, USD/JPY on intervention speculations

Round-up

Heading into the US consumer price index (CPI) data last night, the US Federal Reserve (Fed) was hoping to see “more good data” to have greater confidence in opening the door to upcoming rate cuts and the second straight month of downside surprises in US inflation seems to tick the box.

Headline inflation dipped to 3.0% year-on-year from the 3.3% prior, while the core aspect touched its lowest level since May 2021 at 3.3% from the 3.4% prior. Importantly, the supercore services inflation declined for a second straight month, in reaction to easing housing inflation.

It seems that the Fed can hardly find fault with this set of numbers and markets thought so as well, with further dovish bets in place to price for a September rate move (85% odds versus the 70% before the CPI release). Treasury yields dipped across the board, with the 10-year yields touching its lowest level since March this year, while the US dollar was down close to 0.5%.

US dollar dipped back to key trendline support

Further build-up in dovish rate expectations dragged the US dollar to its one-month low overnight, briefly dipping below a key upward trendline support before dip buyers stepped in to defend the trendline. For now, buyers are still attempting to keep the higher-lows formation since July 2023 intact, but it has been an arduous battle. Its daily relative strength index (RSI) has struggled to cross back above its mid-line, which may suggest sellers still in near-term control. One to watch for any dip below the June 2024 low at the 103.40 level, which could be a signal of buyers giving way.

Outsized move in USD/JPY raised intervention speculations

An outsized reaction seems to be presented in the USD/JPY, with the pair dipping as much as 2.68% overnight at one point before paring some losses. The scale and speed of the downside move are sufficient to spur speculations on whether Japanese authorities have taken advantage of the dovish US inflation print to amplify its intervention. Of course, any official confirmation from authorities will only come some time down the road, but with previous intervention efforts being overridden by dip buyers fairly quickly, the question remains on whether it will be the same this time round.

The volatility is set to continue into this morning, with dip buyers stepping in to defend an immediate support at the 158.26 level, at least for now. On the daily chart, a crucial upward trendline support is in place as well, with any breakdown of the upward trendline likely to raise the odds of a potential trend reversal to the downside.