Markets to watch this week

US Dollar Index: Sell-off stabilises for now

The US dollar is looking to stabilise after recent sell-off, as expectations for aggressive rate cuts from the Federal Reserve (Fed) softened amid a recent run of stronger-than-expected US economic data.

However, while a hard landing is not the base case for now, any weaker-than-expected turnout on the data front could easily revive recession concerns, which could trigger fresh downward pressures on the dollar. This comes as markets are back to riding on the ‘bad news is bad news’ narrative, ever after the Fed has anchored expectations for its rate-cutting cycle to kickstart in September.

Narrowing yield differentials between US and other major economies will remain a key overhang for the US dollar, but with cumulative 100 basis point (bp) worth of rate easing priced by markets through the rest of the year, one may also argue that much has been priced for now.

This may keep the US dollar on a broad consolidation range, which has already been in place since January 2023. Near-term, an upward trendline for the US dollar has been broken down at the start of the month, while its daily relative strength index (RSI) failed to cross back above its mid-line upon a retest, seeming keeping sellers in control. Any move below the 102.00 level could potentially pave the way towards the 100.50 level next, while on the upside, the 103.40 level will serve as immediate resistance to overcome.

Levels:

R2: 104.60
R1: 103.40

S1: 102.00
S2: 100.50

US Dollar Index chart:

USD/JPY: Trendline resistance in the way

As the policy divergence story between the US Fed and the Bank of Japan (BoJ) is set to reverse, the USD/JPY has retraced as much as 12.4% from its July 2024 high before finding some room to stabilise recently. This comes as technical conditions moderated from oversold levels into more neutral territory, with a near-term bullish crossover presented in its daily moving average convergence/divergence (MACD).

A look at the latest Commodity Futures Trading Commission (CFTC) data revealed that non-commercial net positioning for traders is at its lowest net-short level since March 2021, which suggests that the bulk of the unwinding in the yen carry-trade may be behind us. This may help to alleviate some downward pressures on the USD/JPY for now, but narrowing US-Japan yield differential will remain a headwind for the bulls to digest.

On the technical front, a key upward trendline is now serving as crucial resistance to overcome at the 148.12 level. The breakdown of the trendline support at the start of the month may still present a downward bias for now, with any failure to cross back above the trendline potentially leaving its 5 August low at the 141.70 level on watch. This level coincides with the lower edge of the weekly Ichimoku Cloud support for the pair, which has not been broken down since March 2021.

Levels:

R2: 151.90
R1: 148.12

S1: 146.26
S2: 140.53

USD/JPY chart:

Straits Times Index (STI): Near-term support on watch for some defending

Aggressive rate cuts from the US Fed may not be good news for the local banking stocks, given the banks’ dependence on net interest income in its overall earnings. Aggressive responses from policymakers tends to come as a result of higher economic risks as well, which could call for higher loan losses provisions from the banks. This may explain the sharp decline in the STI over the past two weeks, with 45% of its weightage exposed to the banking sector.

That said, following a close to 9% retracement from its July peak, the STI has found near-term support at an upward trendline at around the 3,200 level as technical conditions seek to moderate from previous oversold levels. Over the past three weeks, there has been net institutional outflows from the index based on the Singapore Exchange (SGX)'s data, but at least, the extent of outflows has eased for now.

Any successful move in reclaiming the 3,300 level, which marked the high of last Monday’s global equities sell-off, may bode well for further recovery in the index. This may leave buyers to eye for a retest of the 3,390 level next. On the downside, any breakdown of the trendline support could see the index head to the 3,152 level next.

Levels:

R2: 3,356
R1: 3,300

S1: 3,200
S2: 3,152

STI chart:

Spot Gold: Eyeing for a break to fresh record high?

Impending rate cuts from the US Fed, healthy central bank demand, along with the yellow metal’s status as a hedge against geopolitical and economic risks, may continue to serve as tailwinds for gold, which have kept prices well-supported thus far. Prices are now standing just less than 3% away from fresh record high level, while its daily RSI continues to hang above the mid-line, which suggests buyers retaining control.

Ahead, one to keep an eye on the US consumer price index (CPI) data this week, with any further inflation progress likely to be well-received by the yellow metal. Expectations are for US headline inflation to ease to 2.9% from previous 3.0%, while the core aspect may ease to 3.2% from previous 3.3%. The risks may come in terms of any unexpected upside surprise, which could challenge current market pricing for back-to-back rate cuts through the rest of the year.

On the technical front, prices have been trading in consolidation since April this year, with buyers potentially eyeing for a retest of the US$2,451 level ahead as prices trade on near-term higher lows. This is where the upper bound of the range stands. Any breakout of the range to a fresh all-time high could leave the US$2,600 level in sight next.

Levels:

R2: 2,600
R1: 2,451

S1: 2,364
S2: 2,290

Spot Gold chart: