USD/JPY firmer, Wall Street rattled as Fed tame doves ahead of Powell

Momentum finally turned lower on Wall Street after two Fed members forced traders to question their increasingly dovish positioning, ahead of Jerome Powell’s speech at Jackson Hole. Boston Fed President Susan Collins told Bloomberg and Fox news that Fed cuts should be “gradual” and “methodical”, which was backed up with similar wording by Philadelphia Fed Chief Patrick Harker.

While they backed rate cuts to begin soon, their comments cast a shadow of doubt over the pace of easing into next year. And these comments took center stage, despite a softer US service PMI report. Markets reacted with a classic response to a shift of less-dovish-than expected news. The moves are not excessive compared to the rally we have seen over the past few weeks, but big enough to leave an array of bearish engulfing days and make traders pause for thought before their next blast of dovish hopium.

Bond yields drove the US dollar higher, seeing EUR/USD, AUD/USD and the like pull back from their peaks, tracked lower by gold and Wall Street indices.
Bearish days formed on the Dow jones, S&P 500 and Nasdaq 100 (which faltered below $20k)
WTI crude oil broke a 4-day losing streak and bounced from support in line with yesterday’s bias, reaching a high of around $73.50 above the $73 target.
USD/JPY may have formed its swing low above in line with my bias, with a 3-day bullish reversal (morning star)

Events in focus (AEDT):

Jerome Powell’s speech is the big event of the week, and hopes for a dovish speech may have been priced in already. That leaves markets vulnerable to retracing further against recent moves (which is an extension of moves seen on Thursday) if Powell does not lay out a path of multiple rate cuts this year and next. Anything less could further support the US dollar and yields to the detriment of risk assets such as commodities, commodity FX and indices.

08:45 – NZ retail sales
09:01 – GfK consumer confidence
09:30 – JP CPI
15:00 – SG CPI
22:30 – US building permits
22:30 – CA retail sales
00:00 – Fed Chair Powell speaks at Jackson Hole

USD/JPY technical analysis:

A 3-day bullish reversal pattern has formed on the daily chart of USD/JPY, which hints at a swing low. The bias this week has been to seek dips towards 144 in anticipation of a move towards 150, and the low may already be in place at 144.47.

A falling wedge pattern has emerged on the 1-hour chart, alongside a bullish divergence. The wedge projects an upside target near its base just below the 150 handle and high-volume node (HVN) at 149.77. Bulls could seek dips towards Thursday’s low in anticipation of the next leg higher. Note the high-volume 144 handle, 145.16 HVN and monthly S1 at 145.64 which could provide potential support should prices retrace lower.

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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