FX Watch: USD/JPY at trendline resistance, USD/SGD back at Dec 2023 low

Round-up

Global markets seem to be sounding the all-clear signal following the recession scare last week, with Wall Street extending its gains to the fourth straight day. The VIX closed below its key 20 level as a reflection of subsiding fears, with a fall below the level generally pointing to more risk-on sentiments.

Overnight, the US July producer prices has been promising, which built the case that softer producer pricing pressures may feed through to upcoming consumer prices as well. Overall, the inflation data is likely to put inflation risks further on the backseat compared to growth data, with market participants holding the view that the Federal Reserve (Fed) can soon jump to the rescue with more aggressive rate cuts if economic conditions weaken significantly ahead.

The US consumer price index (CPI) will be on watch tonight, with expectations for both headline and core readings to ease to 2.9% and 3.2% respectively, down from previous 3.0% and 3.3%. Any downside surprise in the read may likely anchor market rate expectations for a 50 basis point (bp) rate cut by the Fed in September.

USD/JPY retesting trendline resistance

Promising inflation progress in the US has translated to a drag lower for Treasury yields, which saw an in-tandem drop in the US dollar index by 0.5% overnight. Following a breakdown of a key upward trendline at the start of the month, the USD/JPY is now back to retest the trendline resistance at the 148.12 level.

Fundamentally, narrowing US-Japan bond yield differentials may continue to serve as an obstacle for the pair, as the two central banks embark on a different rate path from each other. Further weakness in US growth data ahead could easily call for more dovish bets, which could anchor current market views for back-to-back rate cuts from the Fed.

Failure for the USD/JPY to overcome the 148.12 level could point to a broader downward bias for the pair, which could leave last Monday’s low at the 141.68 level on watch. On the other hand, any move back above the trendline could leave the 151.96 level as the next resistance to overcome.

USD/SGD back at December 2023 low

The USD/SGD has retraced as much as 2% since the start of the month, with the pair wiping out all of its year-to-date gains and is back to trade near its December 2023 low. The 1.316 level will serve as immediate support to hold, having supported the pair on two previous occasions, which also marked the base of a broader consolidation range.

Oversold technical conditions may raise the odds of a near-term bounce, but the 1.328 level will likely serve as resistance. Any breakdown of the 1.316 level could open the door for the pair to retest its 2023 low at the 1.303 level next.