Some dip-buying ahead of FOMC meeting: US dollar index, USD/JPY, Gold

Market Recap

Another last-hour dip-buying for major US indices aided to reverse earlier declines, delivering a positive close for Wall Street overnight. This comes despite a further move higher in Treasury yields in the lead-up to the upcoming Federal Open Market Committee (FOMC) meeting, with the two-year yields inching closer to the 4% mark at 3.95% while the 10-year yield is in the midst of retesting its June 2022 high.

On the other hand, the US dollar has been largely trading in consolidation mode over the past few trading days, with another attempt to break to a one-week high overnight finding some resistance eventually. It currently hangs at the lower base of the consolidation zone, and with risk sentiments tracking the US dollar moves closely over the past weeks. A break below the 109.00 level could translate into further relief for risk assets.

Economic data overnight revealed signs of a further slowdown in the US housing market, with the National Association of Home Builders (NAHB) Housing Market Index reading showing homebuilder sentiment declining for the nine straight months (46 versus 47 forecast). The confluence of headwinds for sentiments came from rising mortgage rates, still-high construction costs and tighter economic conditions. More homebuilders also reported lower home prices but it could take a few months before the effect are presented in the form of lower rents. This may play a key role in lowering shelter costs in the US consumer price index (CPI) eventually, which takes up a third of the calculation basket, but until then, some persistence in pricing pressures for now could leave Federal Reserve (Fed)’s tightening process intact.

For the upcoming FOMC meeting, a hawkish Fed has been largely expected but interest rate bets have also been ramped up with the hot CPI data, so it is a basis of aligning policymakers’ views with current expectations. A 75 basis-point (bp) hike is fully priced, with an 18% chance of a 100 bp increase scenario. An upward revision from the June dot projections seems more likely than not, with the Fed Funds futures pricing for a year-end rate of 4.00-4.25% in 2022 until 2023. Being fairly aligned to expectations may suggest that much has been priced for now, which could be tapped on for some near-term relief before a series of Fed comments kicks in.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.04%, ASX +1.23% and KOSPI +0.87% at the time of writing. The Japan market is back from its holiday break. Overnight dip-buying being presented in Wall Street for the second straight trading day seems to provide an uplift for risk sentiments in the Asia session, although a tone of caution still largely lingers ahead of the FOMC meeting. One to watch for moves in the US dollar, with some continued weakness into the Asia trading session.

The economic calendar today saw the release of Japan’s headline inflation rate at 3.0% versus 2.6% in July, while the core aspects came in slightly higher than expected at 2.8% versus 2.7% consensus. The further pull-ahead from the Bank of Japan (BoJ) target of 2% could translate into more pressure for the central bank to shift away from its accommodative policies but expectations are that easy monetary policies are to remain in the upcoming meeting this week. The BoJ Governor Haruhiko Kuroda previously mentioned that he wanted to see a ‘stable and sustainable rise’ in both wages and prices before considering any policy shift. With that, a moderation in August import prices and a slowdown in Japan’s average wage to 1.8% year-on-year (YoY) growth from previous 2% could still be looked upon to justify the lower-for-longer policy stance. Further out, probability for a 0.1% increase in its short-term interest rate remains priced at a mere 11% probability in the October meeting.

Yield differential on policy divergence continues to be the key driver for the USD/JPY (大口）, as a recent retest of its 24-year high at the 145.00 level was met with some wait-and-see. The 145.00 level marks a peak back in 1998, where a previous round of intervention was in place to address the weak yen at the time. While a bearish moving average convergence divergence (MACD) crossover was formed on the daily chart, along with a bearish pin bar on its weekly timeframe, a close below the 141.50 level could be warranted to bring about a retracement to the 138.00 level next. Fundamentally, we may need to see signs of peak hawkishness from the Fed or a policy shift from the BoJ, in which both seems to be off the table for now. Therefore, the ongoing upward trend suggests that in the event of a retracement, looking out for the formation of a higher low could be the preferred approach.

On the watchlist: Gold prices retesting key resistance ahead of FOMC meeting

Higher Treasury yields and a stronger US dollar on the back of expectations for more aggressive Fed’s policies have not been positive news for gold, which crashed through a key support at the US$1,680 level to hang around its two-year low. The level marks a key 38.2% Fibonacci retracement level, which has supported prices on at least five previous occasions and failing to hold seems to reflect the strong bearish pressure faced by the yellow metal. Prices were attempting to stabilise at the start of the week, but continues to hang below the US$1,680 support-turned-resistance, with the recent formation of a new lower low giving it an ongoing downward bias. The FOMC meeting will be on watch next. Aligning to current rate expectations may give a reason for gold prices to recover in the near-term, but eventually it may take some indication of peak hawkishness from the Fed before more sustained upside can be drawn to gold prices. That has not been present yet with inflation risks leaning to the upside, which suggest that any price recovery will be looked upon to form a new lower high as a continuation of its downward trend.

Monday: DJIA +0.64%; S&P 500 +0.69%; Nasdaq +0.76%, DAX +0.49%, FTSE closed