Dollar Index (DXY) is showing signs of slower decline, mid-term outlook shows possible consolidation. Yen and Pound are in the spotlight. The Loonie suffers huge loss against the dollar

• The US Dollar ended the week with a slight decline but managed to claw back above 104.00 psychological level.
• The Fed inflation gauge Personal Consumption Expenditure (PCE) number is at 2.6%, largely in line.
• The Yen finally saw the light of hope after the USD declined towards 152.00 region. 150.00-149.38 support will be watched for potential rebound.
• The GBPUSD managed to maintain its strength and stay above 1.2800 psychological level after reversing from the high of 1.3047.

Two major events that shocked the dollar: BOJ intervention and possible rate cut after PCE maintained at 2.6%.

Over the past five days, the US Dollar (USD) experienced volatility primarily due to developments surrounding the Japanese Yen. This included a significant unwinding of short positions, anticipation of a potential rate hike by the Bank of Japan (BoJ) at its July 31 meeting, and the impact of recent foreign exchange interventions by the BoJ and the Ministry of Finance (MoF). Also, the most watched will be the commitment of how much the Bank of Japan (BOJ) will be performing in tightening in 2H24. However, the Tokyo CPI number has been on a decline, and this is a huge risk for an interest rate hike and Quantitative Tightening. Also, the strength of the yen has been increasing and this sparks some suspicion that the carry trade of the Yen against the Dollar is unwinding, and this may pose a risk to the larger equity market.

Additionally, the rising expectations that the Federal Reserve might cut its Fed Funds Target Range (FFTR) in September contributed to the cautious sentiment toward the Greenback. Any rate changes at the Fed’s July 31 meeting seem unlikely.

Notably, speculation of a September rate cut intensified immediately after the Consumer Price Index (CPI) indicated that the US economy’s disinflationary trend resumed in June. This was further supported by a cooling domestic labor market.

Furthermore, US inflation tracked by the Personal Consumption Expenditure (PCE) showed a slight decline in the headline figure over the past year (2.5% compared to May’s 2.6%) but remained unchanged in the core reading (2.6%).

Bank of England – Rate cut expectation has increased

The Bank of England is likely looking at a strong possibility of a rate cut after two out of the nine-strong committee have already started voting for rate cuts. Secondly, the inflationary pressure in the UK has subsided, especially the core CPI numbers. The biggest contributor to the rate cut narrative for the Bank of England is that the unemployment rate has risen to 4.2%. While UK GDP grew at a faster pace, the narrative of growth is likely due to the nature of pricing in the rate hike. Hence, the possibility of a rate cut stays. As for the sterling, we believe it is likely to see brief strength against the dollar before heading for the rate cut announcement next week.

Technical outlook on GBP/USD – Attractive to buy on correction

The GBP/USD has reached our long-term target price at 1.3000 earlier than expected based on our previous outlook dated 9 July 24. Despite a sharp correction thereafter, the major bullish sentiment remains. Below are the key pointers to note:

1. GBPUSD remains elevated above the 26-period base-line and the leading Span A and B of the ichimoku. To add, the senkou span A and B continue to rise, giving confidence that the sterling is still very much bullish.
2. Long-term MACD is showing a clear bearish signal over the longer-term period as histogram is negative.
3. The stochastic oscillator shows an overbought cross, but it has yet to dip below the 80-line, hence, any correction is a sign to buy on rebound.
4. 28-period ROC remains flat despite staying elevated above the zero line.

Buy at spot at 1.2863 or 1.2681 to 1.2750 should there be a rebound. The target will be at 1.3200 over the longer-term period. The trade will be invalidated should it dip below 1.2520.

Technical outlook on USDJPY – In a bearish trend, with possible correction heading towards 149.38 in the mid-term

The Japanese Yen saw great decline at our key resistance zone between 160.00-163.74, after coming close to the 162.00 psychological level. The sell-off has intensified over the past 3 weeks and has seen some slight rebound at our expected support zone of 151.97 mentioned in our previous report dated 24^th June 24. We believe the mid-term trend will consolidate, tilting towards the bearish trend based on the technicals. Below are the key pointers:

1. Ichimoku has formed the three bearish death cross in sequence.
2. Long-term MACD is showing a clear bearish signal over the longer-term period as the histogram has turned negative. The MACD/Signal line has performed a crossover at the top
3. The stochastic oscillator has confirmed the overbought crossover.
4. 28-period ROC has dipped below the zero line.

We prefer to sell on rebound should there be an adverse rejection at 155.70-157.10 resistance region. Should this come to pass, the target price will be 149.38.

Figure 3: Personal Consumer Expenditures – Disinflation progression

Sources: CGSI RESEARCH, CEIC

Figure 4: UK Inflation – Disinflation is satisfactory

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