FX Watch: USD/JPY, AUD/JPY attempt to stabilise but trendline breakdown remains on watch

Round-up

A busy week of US big tech earnings and a slew of key central bank decisions ahead have kept risk sentiments in a cautious state, as major US indices failed to retain their initial gains overnight and ended the session with a flat close. The VIX was just slightly higher by 1.3%, after easing from a key downward trendline around the highly-watched level of 20, which reflects some market indecision kicking in.

We may expect risk-taking to be more subdued in today’s session as well without much of a concrete catalyst to drive market direction, before volatility picks up in reaction to big tech earnings after-market and as the Federal Open Market Committee (FOMC) meeting gets underway. With a Federal Reserve (Fed) rate cut in September fully priced by markets, much around the upcoming meeting will hinge around policymakers’ guidance on what comes after that. Any call for back-to-back cuts could potentially be met with a mixed market reaction, given that it may be perceived as a higher degree of economic risks in the US economy to call for more urgency in easing.

USD/JPY attempting to stabilise after recent plunge

The Bank of Japan (BoJ) will kick off its meeting today, with market participants having their eyes around the central bank’s interest rate decision and clearer steps towards tapering its government bond purchases over the coming years. Above-target inflation and stronger wage growth may offer some confidence for the central bank’s hopes of a wage-price virtuous cycle, but weak consumption remains a source of reservation in tightening.

With market participants leaning towards a 10 basis point (bp) rate hike in the upcoming meeting (57% probability), any inaction on interest rate from the central bank will come as a dovish surprise and could see the Japanese yen unwind its recent strength. For now, the USD/JPY is attempting to stabilise around the 154.00 level, following near-term oversold technical conditions.

A breakdown of a key upward trendline this month, along with a move below its daily Ichimoku Cloud support for the first time since April 2023, may still point to a broader trend reversal in place to the downside. Near-term resistance may be found at the 154.60 level, most recently met with a slight rejection last week where a 23.6% Fibonacci retracement level resides. On the downside, the horizontal support at the 151.95 level will call for some defending, with any failure to hold the level potentially leaving the 147.27 level on watch next.

Upward trendline breakdown for AUD/JPY in focus as well

Similarly, the AUD/JPY has broken below a key upward trendline support as well, which has previously supported higher lows for the pair on at least three occasions. The formation of a daily bullish hammer reflects some near-term dip-buying, following a more than 9% retracement since 11 July this year as technical conditions attempt to moderate from extreme oversold levels.

That said, buyers will have to reclaim the upward trendline to reflect greater control, with near-term resistance to be found at the 101.60 level. Failure to head back above the trendline could still leave a broader downward bias in place, which could see sellers challenge the dip-buying level at 99.20 ahead.