• USDJPY rapid fall pauses near key support region as investors wait for BoJ tightening

• Gold shows signs of recovery ahead of FOMC rate decision and nonfarm payrolls

• Will the BoE meeting send GBPUSD lower? Focus turns lower to 1.2750 area

 

BoJ rate decision --> USDJPY

Central bank meetings will take center stage this week, with the Bank of Japan’s policy announcement on Wednesday drawing the most attention as investors speculate about the possibility of double tightening measures. Although the base scenario is for steady interest rates, futures markets are pricing in a 63% probability for a 10bps rate hike on top of a modest monthly reduction in bond buying from ¥6 trillion to ¥5 trillion.

Some caution, however, is required. The economy dipped into contraction in the first quarter. Hence, the mentioned restrictive actions might be seen as excessively forceful right now. Nevertheless, if the central bank cites changes in the deflationary mindset to justify the jump into the hiking cycle, the Japanese yen could enjoy some extra gains against the US dollar. In this case USDJPY could slip below the current support region of 153.45 to test its 200-day SMA and the 150.93 barrier. A step lower could motivate a sharper decline.

Alternatively, if the central bank disappoints those who expect tightening actions, the pair could bounce up to meet the 155.00 barrier and then the 156.40 constraining zone ahead of its 20- and 50-day SMAs at 157.90.

FOMC policy meeting, Nonfarm payrolls --> Gold

Meanwhile in the US, investors are certain that the Fed will deliver its first rate cut in September. Therefore, this week’s policy meeting might simply confirm the probability of the current rate cut pricing in markets. Dot plots and economic forecasts will not be updated, and if necessary, communication adjustments could still be possible during the Jackson Hole symposium in August.

In the event Powell retains a somewhat hawkish stance and raises concerns about the need for a second rate cut in the current year, the US dollar could move upwards while gold could decrease and test its 50-day SMA at 2,360. A stronger-than-expected US employment report on Friday might be needed in this case to scale back rate cut expectations and add more pressure on gold.

In the opposite scenario the Fed endorses the pricing of two rate cuts this year and nonfarm payrolls downbeat miss forecasts of 176k new jobs positions, gold bulls could gain fresh momentum towards the next resistance of 2,410 and perhaps attempt to cross above the key wall of 2,430-2,438.

BoE rate decision --> GBPUSD

The Bank of England’s policy decision will not be missed on Thursday. Many have been eagerly anticipating the UK’s shift into the easing cycle in August, particularly due to inflation reaching the central bank’s 2.0% target in June.

Forecasts flag a 25bps rate cut, but futures markets suggest the debate could be tough. Probably more data might be needed to ensure price stability as geopolitical tensions and domestic economic challenges remain. Still, BoE governor Andrew Bailey had once said that the central bank might cut interest rates before inflation meets its target. Hence, a rate cut might not be such a big surprise. Perhaps the voting structure could cause some market reaction if more policymakers back a rate cut and vice versa.

In FX markets, GBPUSD is looking bearish. Selling pressures picked up pace below the 20-day SMA today, shifting the spotlight towards the 50-day SMA and the trendline zone of 1.2730-1.2750. Failure to pivot there could dampen market sentiment, causing another downfall towards the 1.2615-1.2635 region.

On the upside, the bulls must reclaim the 20-day SMA and the 1.2870 threshold in order to crawl up to 1.2937 again.