The USD/JPY has reversed upwards after hitting depths early this week that had not been seen since the first week of June.

As of this writing the USD/JPY is traversing close to the 134.200 mark in rather quick trading. After hitting a low of nearly 130.400 on early Monday morning – a value last seen on the 6^th of June, the USD/JPY currency pair has risen in value. Traders who thought the perceived ‘overbought’ days of the USD/JPY were coming to an end, and wagered on a one way direction downwards should pause to reconsider their strategy.

Technical Charts are Important, but Central Bank policies Matter and Uncertainty Remains

The ability of the USD/JPY to rapidly gain the past couple of days and the knowledge it is approaching important resistance levels again should cause contemplation for speculators who were convinced strong reversals higher would cease.  Yes, on the 27^th of July the USD/JPY was trading near the 137.480 realm before financial houses reacted to the interest rate hike from the U.S Federal Reserve. The selloff which followed was strong, but perhaps it was too strong.

• The upwards trajectory displayed the past few days of trading shows nervous sentiment remains sizeable regarding the USD/JPY, as a lack of clarity about U.S central bank policy stays murky.
• Tomorrow’s Average Hourly Earnings data from the U.S should be monitored and may have an effect on USD/JPY trading conditions.

If the USD/JPY can maintain its current values near the 134.000 level, this consolidation may be a sign financial houses are awaiting more insight from U.S data on the schedule tomorrow. Yes, the Non-Farm Employment Change numbers are due Friday, but it is the earnings data which should be watched closely.

If the hourly pay statistics comes in stronger than expected, the U.S Fed will have little choice but to remain hawkish regarding its interest rate policy. U.S Manufacturing and Services PMI data has been stronger than expected already this week.

Traders should not Expect Consolidation to Remain and Volatility is Likely

The USD/JPY could find a retest of the 133.750 to 133.250 values easily with reversals lower.  However, while U.S data stands in the shadows which could signal ‘the need’ for additional actions from the U.S Federal Reserve, financial houses may not be large sellers. The opportunity to look for slight reversals lower and place a buying position by day traders may prove enticing for short term wagers looking for upside. The near term is likely to provide additional fireworks for USD/JPY traders and further moves higher may be demonstrated.

USD/JPY Short-Term Outlook

Current Resistance: 134.350

Current Support: 133.690

High Target: 134.970

Low Target: 131.120

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We recommend a lot to sell the sterling-dollar pair from every rising level. The GBP/USD currency pair returned to its bearish track, and its recent gains evaporated. It is reaching the resistance level 1.2333 this week, as it returned amid profit-taking sales to the support area 1.2180 at the beginning of trading today, Wednesday. This may increase the strength of the stronger bearish expectations towards the psychological support 1.2000 at the earliest.

Despite the last performance the Standard Chartered Wealth Management division is bearish on the US dollar in a six to twelve month period as they feel that a major turning point in the global forex currency markets is approaching. Meanwhile, the UK-based lender focused on Asia updated its stance on UK stocks saying they now offer good value and exposure to the commodity pool, a development that supports their bullish thesis on sterling in the medium term.

Accordingly, Steve Price, chief investment officer of the principal investment office at Standard Chartered Wealth Management, says that there are two opportunities in the markets at the moment: “The first is in Asian stocks, excluding Japan,” adding, “The second opportunity is in British stocks, which we expect to benefit from their relatively greater weight. towards sectors with value and profits as well as from a more attractive valuation, compared to the euro area and the United States.”

The forecasts form part of Standard Chartered Wealth Management’s mid-term review detailing their investment thesis for the next half year. We also upgraded UK stocks to ‘favorites’ on the back of their heavy exposure to sectors that could benefit from higher inflation, such as energy, mining, and finance,” says Daniel Lamm, equity analyst at Standard Chartered.

The expected outperformance of UK assets in turn is likely to provide the Sterling with a source of additional support as global investors seek better returns. Indeed, Manpreet Gill, an analyst at Standard Chartered, says he is bullish on a few select currencies against the dollar over the next six to twelve months, most notably the euro and the British pound.

This bullish stance on sterling is based on expectations of “strong growth and employment” as well as the “hard-line” Bank of England. But Standard Chartered warns of downside risks to their fundamental view as the Pound could remain vulnerable to stagflation pressures and geopolitical risks. The big call that will eventually raise the pound-to-dollar exchange rate is the expectation that the US dollar will peak in the second half of 2022. This is as optimistic expectations about Fed policy fade as inflation eases.

Meanwhile, global central banks will continue to tighten monetary policy to avoid a weakening of their currency as this leads to increased inflation. Accordingly, the bank analyst says, “Global central banks are following the Fed with a tighter policy, aiming to avoid weaker currencies and even higher inflation. And that would eventually weigh on the dollar.” He adds that capital inflows should revolve away from the US towards more attractive value assets, such as UK stocks. Indeed, Standard Chartered Bank remains in the near term “broadly neutral” towards the dollar and warns that sticky US inflation data may leave the Fed unilaterally focusing on tightening policy.

Moreover, the global economic slowdown and financial market constraints may prevent global central banks from the opportunity to raise interest rates and close the Fed’s gap, thus preserving the dollar’s yield advantage. Another support for the dollar in the near term is the increase in risk aversion due to the Ukraine war and other geopolitical tensions.

So, as a major turning point looms, some patience may have to be exercised in the near term.

The forecast for the pound against the dollar today:

As I expected before, the general trend of the GBP/USD pair will remain bearish and testing the support level 1.2175 will support the next downside move, the psychological support level 1.2000. As I mentioned before, the pessimistic factors of the Bank of England and the superiority of the US Federal Reserve over the latter in the course of raising interest rates, in addition to British political anxiety, will remain factors that negatively affect any gains for the sterling-dollar pair in the coming days.

On the upside, according to the performance on the daily chart, a break of the resistance levels 1.2400 and 1.2665 will be important for a first break of the current trend.

The price of the GBP/USD currency pair resumed its rapid decline from the 1.2600 resistance level to the 1.2471 support level, after the release of the PMI data. This indicated that the British economy was on the verge of contraction in May and that conditions are deteriorating faster than they were situation during the epidemic. The GBP/USD pair is stable around the 1.2530 level at the time of writing the analysis.

The release of the S&P Global PMI for May showed that the UK services sector barely grew with a PMI reading of 51.8, down from 58.9 previously and well below the 57 forecast by analysts. Such a sharp month-to-month drop is almost unprecedented: the monthly loss of momentum in May was the fourth largest on record and surpassed anything seen before the pandemic.

The manufacturing sector held slightly better, but with the manufacturing PMI reading at 54.6, down from 55.8 in April and less than the expected reading of 55. The composite PMI for May – which gives a broader glimpse into the economy – came in at 51.8, less than Expected 56.5 and 58.2 in the previous month.

The data and the pound’s reaction underscore why JPMorgan described the UK as the “poster child” of stagflation when it lowered its forecast for sterling earlier this month. The data also contrasts unfavorably with figures from Europe where the Eurozone PMI data showed continued strong growth in May.

For its part, the global agency Standard & Poor’s reported that private sector companies in the United Kingdom indicated a sharp slowdown in business growth during the month of May as mounting inflationary pressures and rising geopolitical uncertainty constrained customer demand. Indeed, the data pointed to the fastest rise in operating expenses. Since this indicator was launched in January 1998. Moreover, concerns about shrinking margins and weak order books have significantly lowered business expectations for the coming year.

S&P Global has also reported that weak trade dynamics in Britain have been dragging on activity as manufacturers reported the largest drop in export orders since June 2020. A number of commodity producers cited Brexit-related trade frictions as the main contributing factor. Export sales declined in May, particularly regarding new customs rules, additional documentation requirements and other complications with EU trade, according to Standard & Poor’s Global.

However, the data showed a strong rise in employment numbers as companies continue to catch up on unfinished work, S&P Global reports, although the job creation rate has eased slightly since April and has been the least noticeable for 13 months.

The results should continue to support expectations that wages will remain strong going forward. Inflationary pressures remain a concern as average cost burdens rose rapidly in May, with input price inflation at private sector firms hitting a new record high in the survey.

This was driven by the accelerating rise in cost pressures in the service economy, with this indicator reaching its highest level since the survey began in July 1996.

According to the technical analysis of the pair: The performance of the GBP/USD currency pair is in a neutral position with a bearish bias. The bears’ control will strengthen if the currency pair returns to the support levels 1.2465 and 1.2300, respectively. With the last level, expectations of psychological support will return to 1.2000 again. On the other hand, the bulls will collide in the event of a return to control with the resistance levels 1.2635 and 1.2775. Continuing pessimism on the part of the Bank of England and the results of British releases will continue to support the selling of sterling from every upward level.

Sterling fell strongly after the UK’s headline CPI inflation recorded 9.0% yeary-on-year, lower than the 9.1% market had been expecting, but remarkably up from 7.0% recorded in March. The bulk of the gains in inflation were linked to higher energy costs due to Ofgem’s price cap hike in April, and thus economists were largely expected. Accordingly, the price of the GBP/USD currency pair quickly gave up the rebound gains, which reached the 1.2500 resistance level, quickly dropping to the 1.2326 level in the beginning of trading today, Friday.

The next rise in energy prices comes in October when UK inflation is expected to peak near 10%, according to the Bank of England’s forecast. Inflation remains undoubtedly hot, but today’s disappointing numbers against expectations may offer hopeful crumbs to put pressure on households.

CPI inflation rose 2.5% month over month in April, the Office for National Statistics said, up from 1.1% previously, but disappointing versus the 2.6% market expectation. Core CPI, which strips out energy effects and gives a more “organic” feel to domestic inflation, rose 6.2%, but this was in line with market expectations.

On a monthly basis, core rose 0.7% which is already below expectations of 0.8%. Thus, the data does not come as a huge surprise and will not change market expectations regarding a future rate hike from the BoE, and therefore is not likely to have a significant impact on the GBP. However, there was an indirect move down in GBP after the release, which is understandable given that many trading algorithms would be ready for such a move.

For his part, says Callum Pickering, chief economist at Berenberg Bank. From a currency perspective, the question is whether yesterday’s inflation, wages and employment data changes the dial on the number of interest rate hikes the BoE will deliver over the coming months. It appears that the stronger-than-expected wages data encouraged the markets to take further gains, which was reflected in a sharp move higher in the British Pound.

Subsequent inflation data does not have quite the same effect.

Indeed, given both sets of data, Pickering is not convinced that the bank will be inclined to precipitate offering higher interest rates. The bank said: “The big rise in wages in March was due to huge bonuses rather than the sharp acceleration in core wage growth, the big rise in CPI driven by the overseas-driven rise in energy prices, and BoE policymakers are likely to be less concerned with the latest data. than some of the headlines might suggest.

This could deprive the pound of a basic idea of ​​the rise.

“Nothing gets worse forever,” says Morgan Stanley. Morgan Stanley says the dollar should head down decisively by the fall, which will allow the British pound and other major currencies to recover. And in a mid-year strategy update, Morgan Stanley analysts expect more strength in the Northern Hemisphere summer, although this strength is expected to be modest and will ask questions about the bearish outlook in the analyst community for levels below 1.20.

The pessimism of the Bank of England, along with the contrasting results of the recent British economic data and the return of Brexit skirmishes, will remain factors of weakness for the performance of the GBP/USD currency pair in the coming days. Attempts to rebound may be opportunities to consider selling the GBP/USD. A breakdown below the support 1.2220 is important to look towards the next psychological support 1.2000. On the other hand, and as I mentioned before, a strong reversal of the current trend will not occur without the pair breaching the resistance levels of 1.2850 and 1.3000; otherwise the general trend will remain bearish.