FX Daily Strategy: N America, August 27th

On Tuesday, the economic calendar is rather empty with little market moving economic data to be released which meant flows and previous momentum will likely guide the market. USD has been steadily lower since late June as market anticipates the Fed to cut in September and is accelerating after anticipation of a 50bps cut. While the bond market has not doubt front run the move, they are likely right once the easing cycle begins in the U.S. and USD should soften in a medium term if the magnitude of easing is larger than their counterpart and narrow yield differentials. 

USD/JPY has resumed downward traction as Powell is open to a 50bps cut in September. The pair would be eyeing for the early August low, circa mid 141, before a break to the downside. The magnitude of correction could be huge, given the size of previous rally since the Fed begin hiking rates, is as large as 40 figures. The normalization of interest rate from the BoJ also supports the bids in JPY, especially when they are tilting towards the hawkish side of policy steps. In a medium run, we should see more downside than upside in USD/JPY as market follows the narrowing yield differentials.

On the chart, prices remains under pressure to extend break of the 144.45 support last week and follow-through below the 144.00 level extend the broader losses from the 149.40 corrective high. Negative daily studies weighs and see room to the 143.00 level though potential is seen for retest of the 142.00 level and 141.69 low. Below the latter will open up further losses to the 140.50/140.25, 61.8% Fibonacci level and the December low. Meanwhile, resistance is lowered to the 144.45 recent low, now expected to cap and keep pressure on the downside.

Geopolitical tension continues to linger despite both Israel and Hezbollah seems to have back down as both parties suggest the attack is over for now. As long as Israel continue their commitment to complete eradication of Hamas, it is hard to see its traditional allies of military groups stop what they did. The best scenario would be a fruitful peace talk, which did not yield over the previous months and unlikely to be unless being pushed by factors, like rhetoric change within Israel or strong push from the U.S. president. The lingering tension will keep risk currency like Antipodeans in check as they tend to be offered in times of risk aversion.

On the chart, AUD/USD is consolidating strong gains last week to retest the .6800 high of July but pressure remains on the upside. Break here will further extend strong gains from the .6348 low to retest the .6840, 2 Jan YTD high. Beyond this will see potential to the December 2023 high at .6871 then the .6900 level. Meanwhile, support is raised to the .6760/50 congestion area and this is now expected to underpin and limit corrective pullback. Failure here will see room for deeper pullback to the strong support at the .6700 level.