AUD/USD, USD/JPY: Waiting for fresh catalysts after the Fed’s dovish pivot

• Traders expect at least five rate cuts from the Fed in 2024, beginning in March
• Several Fed officials have attempted to push back on this dovish pricing
• AUD/USD and USD/JPY may be vulnerable to a modest reversal in the absence of fresh catalysts

The dovish pivot from the Federal Reserve last week has further eroded the US dollar’s yield advantage over other currencies, adding to the repricing in the likes of the AUD/USD and USD/JPY since the start of November. But with five rate cuts priced into the US curve next year, helping cyclicals run hard on improved sentiment towards the global economy, whether the move can be sustained without further dovish catalysts is questionable. Indeed, there are already signs of fatigue creeping in, adding to the risk of a potential near-term reversal.  

Fed rolls out speakers to push back against rate cut bets

With market pricing for rate cuts growing by the day, it was left up to several Fed officials on Friday to push back against growing easing expectations on Friday. New York Fed President John Williams was the most prominent, telling CNBC the FOMC “aren't really talking about rate cuts right now". Williams suggested it was "premature" to speculate about when and how much rates may be reduced.

Atlanta Fed President Rafael Bostic provided a similar view, suggesting it will likely take several months for the committee to get an adequate signal and develop enough confidence that inflation will return to target before begin easing rates. He described rate cuts as not being an “imminent thing”.

But markets still expect the Fed to cut by March

The remarks saw markets strip around half a cut from the US curve for 2024, although 140 basis points of easing remain. Nor did the attempted pushback meaningfully move the needle when it comes to the expected start of the easing cycle with a cut in March deemed around a 70% probability, according to CME futures pricing.

Source: CME

With Fed officials unable to deliver a uniform message regarding the rates outlook, plenty of scepticism remains among market participants towards the attempted walk-back.

BOJ, RBA impact likely to short-lived

With shifts in the US rates overwhelming nation and region-specific factors, events such as the BOJ’s monetary policy decision and minutes from the RBA’s December rate meeting are unlikely to have a long-term impact on the AUD/USD and USD/JPY this week. Yes, the BOJ could surprise and tighten prematurely, but it would come at the cost of its credibility having pinned evidence of sustained wage pressures as a prerequisite to normalise policy. The RBA minutes could also come across as more hawkish than the tone of the statement, but having been the pattern in the prior two meetings with Michele Bullock as Governor, it’s arguably expected.

Instead, with only second tier US housing and consumer data to navigate early in the week, Fed speak, along with release of US PCE inflation on Friday, loom as the most likely catalysts to shift the AUD/USD and USD/JPY this week. With declining trader participation ahead of Christmas and quarter-end window dressing to contend with, movement maybe choppy for much of the week. Therefore, unless you have high conviction, reducing position sizes and widening stops may reduce the risk stemming from sudden and unexplained reversals.

AUD/USD finding sellers above .6720

Having enjoyed a solid run from the high 62s to the low 67s, including breaking downtrend resistance cleanly last week, the AUD/USD rally has paused over the past couple of sessions, running into sellers parked above .6720. While the path of least resistance is higher right now, with Fed officials attempting to correct abundant dovish pricing, you wonder whether it will be able to continue its run higher in the absence of fresh catalysts?

Another failure to clear and hold above .6720 will help build the case for downside in the near-term, with .6660, .6630 and more pronounced support at .6600 potential targets for those considering shorts. However, with RSI and MACD trending higher and seasonal patterns that tend to favour risker assets, any deeper pullback appears unlikely right now.

Should AUD/USD manage to break and hold above .6720, there is not a lot of visible resistance evident until you get towards .6900. Whichever way the price action moves, traders can use .6720 for protection, allowing stops to be placed above for shorts and below for longs.

USD/JPY unwind stalls ahead of BOJ

Much like AUD/USD, the pullback in USD/JPY has also stalled around 141.50, coinciding with the modest trimming of US rate cut expectations following the pushback from the Fed’s Williams on Friday. While the downtrend in MACD and RSI are hardly under threat, the latter is approaching oversold territory. Combined with the inability to break support around 141.56, it suggests fresh catalysts may be required to extend the move further. Perhaps it will come from the BOJ but it’s more likely to be driven by the USD-leg in the absence of an unexpected hawkish tilt from Tokyo.

The proximity of the 200-day moving average is one complicating factor for those considering longs, making a clean break of that a potential prerequisite to enter trades. Above, 144.80 would be the obvious target with a stop below the 200-day or horizontal support around 141.56 for protection. Should 141.56 give way, traders could go short on the break – with a stop above – with little visible support evident until around 138.75.

-- Written by David Scutt

Follow David on Twitter @scutty

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