Overview
The US dollar has weakened despite dissent from three Federal Reserve officials who advocated for a rate hike. Traders have adjusted their expectations, pushing back the anticipated timeline for a second rate increase. The focus now shifts to the Bank of Japan (BOJ), with particular attention on the USD/JPY and GBP/JPY currency pairs.
Fed Dissent Fails to Lift the US Dollar
The Federal Reserve maintained its interest rate target at 3.5%–3.75%, despite three members dissenting in favor of a 25 basis point hike. The market reaction was muted, as the meeting was not perceived as hawkish. Fed funds futures indicate a likelihood of a September hike, but the probability of a second hike has been pushed to March, with only a 36.2% chance.
Comments from Fed officials suggest that inflation remains a concern, which could lead to a September hike unless economic data weakens significantly. The uncertainty surrounding future hikes has contributed to the US dollar's decline, with notable movements in other currency pairs such as EUR/USD and GBP/USD.
BOJ Guidance Could Drive the Next Move in USD/JPY
Attention is now on the upcoming BOJ meeting, where it is expected that the policy rate will remain unchanged following a recent increase to 1.0%. The market is looking for forward guidance from the BOJ, particularly regarding growth outlook and inflation risks. A lack of hawkish surprises could lead to further weakness in the Japanese yen, favoring bullish positions in GBP/JPY and USD/JPY.
However, traders should remain cautious, as the BOJ has a history of surprising the market. Any unexpected hawkish guidance could lead to a significant appreciation of the yen.
GBP/JPY Technical Analysis
The GBP/JPY pair is exhibiting a strong bullish trend, characterized by a steady price action reminiscent of a trending stock. Following a rally from June to July, the pair has experienced a shallow retracement, which appears to be a correction. A bullish engulfing candle suggests that the correction may be complete, with the near-term bullish bias remaining intact.
Resistance levels are identified around the July high and the weekly R3 pivot, while support is expected at the recent lows.
USD/JPY Technical Analysis
Similar to GBP/JPY, USD/JPY is also in a bullish trend, although the price action is less convincing. The pair has encountered resistance near the monthly R1 level. If the price retraces, potential support levels include the 163 handle and the 20-day EMA. Traders are advised to exercise patience as they await further confirmation of support in a weak US dollar environment.