GBP/USD, USD/JPY Forecast: Two Trades to Watch

GBP/USD falls after inflation unexpectedly cools

• UK CPI cools to 6.7% YoY vs 7% expected
• Traders reassess the BoE path for interest rates
• GBP/USD fall below the 200 sma

GBP/USD is falling to its lowest level since May after UK inflation unexpectedly cooled.

Headline CPI eased to 6.7% YoY in August, down from 6.8% in July and slower than the 7% increase that economists had forecast. Core CPI, which strips out more volatile items such as food and fuel, cooled to 6.2%, down from 6.9% previously and well below the 6.8% expected.

The biggest contributor to the slowdown of inflation was food inflation, which cooled to 13.6%, down from 14.9%. Meanwhile, prices at the pump pushed higher on the back of oil’s persistent rally.

The big question is, what does all this mean for the BoE interest rate decision tomorrow? Traders have downwardly revised the odds of a 25 basis point increase to 70% from 90% prior to the data. The market has also almost completely priced out another interest rate hike from the central bank after tomorrow, meaning that if the BoE does hike rates, it's likely to be the last hike in this cycle. As a result of these revised BoJ expectations, the pound has dropped sharply.

Meanwhile, the US dollar is looking ahead to the Federal Reserve interest rate decision later today. The Fed is expected to keep rates unchanged but is likely to leave the door open for further hikes, given the recent rise in inflation.

GBP/USD forecast – technical analysis

GBP/USD has extended declines, dropping below its 200 sma for the first time since March as it heads towards the 1.23 the MaY low. A break below 1.23 opens the door to 1.20 the psychological level.

Meanwhile, any recovery in the price will need to rise above the 200 sma at 1.2450 ahead of 1.2530, last week’s high.

USD/JPY at 2023 high ahead of the FOMC rate decision

• The Fed is expected to keep rates unchanged
• Dot plot could point to another hike this year
• USD/JPY is testing resistance at 148.00

USD/JPY Is hovering around the 2023 high ahead of the Federal Reserve interest rate decision. The Fed is widely expected to leave interest rates on hold at a 22-year high of 5.25% to 5.5%. This will be the second time this year that the Fed will have paused the hiking cycle. However, the Fed is likely to leave the door open for another interest rate rise potentially as soon as November.

With inflation still well above the Fed's 2% target and the US economy resilient, Federal Reserve policymakers could pencil in another hike in their quarterly projections.

The market will be focused on whether the dot plot shows policymakers determined to hike again. According to the CME Fed watch tool, the market still sees a 70% probability that the Fed will leave rates unchanged again in November. Although economists are more convinced that another hike could happen, particularly as the Fed could raise its 2023 growth forecasts to around 2% this would be double what it was expecting just in June.

This comes after the OECD also upwardly revised its growth forecast for the US economy to 2.2%, up from 1.8% forecast in June.

Given that no hike is expected, the focus will be on Powell's press conference, where he is likely to be questioned over expectations of another rate hike. Fed chair Powell is likely to want to keep his options open. The last thing he needs is the market pricing in an early 2024 rate cut.

Meanwhile, the yen is struggling after the Japanese trade deficit fell again in August to 930.5 billion yen. This marked the second straight monthly decline as exports to China slumped 11%.

Beyond the Japanese trade data, investors will continue to speculate over the timing of the BoJ’s move away from negative interest rates. BoJ’s rate decision is on Friday.

USD/JPY forecast – technical analysis

USD/JPY has struggled to push beyond resistance at 148.00 despite repeated attempts. The RSI supports further upside.

A meaningful break above 148.00 could see the price advance rapidly towards 148.80, the November high, and 150.00 the psychological level.

Sellers could look for a break below the 20 sma at 147.00 to open the door to 145.90, the September 8 low, and 145.00, the July high.