The U.S. dollar and Japanese yen both experienced declines on Tuesday as global currency traders positioned themselves for significant policy announcements from the U.S. Federal Reserve and the Bank of Japan. Market participants are widely anticipating a 25-basis-point interest rate cut from the Fed, while also looking for signals about the potential for further easing before the end of the year.
This environment of anticipation has created distinct technical patterns across major yen currency pairs. The USD/JPY pair is showing signs of a potential downward move, whereas the EUR/JPY and AUD/JPY pairs appear poised to continue their upward trends.
Key Takeaways
- The U.S. dollar and Japanese yen weakened simultaneously ahead of crucial central bank meetings.
- Financial markets have largely priced in a 25-basis-point rate cut by the U.S. Federal Reserve.
- Technical analysis suggests a potential bearish breakout for USD/JPY, while EUR/JPY and AUD/JPY show continued bullish momentum.
- Strong economic data from Germany helped propel the EUR/USD to a near four-year high.
- The Swiss franc reached its strongest level against the U.S. dollar since the SNB removed its euro peg in 2015.
U.S. Dollar Under Pressure Amid Fed Rate Cut Expectations
The U.S. dollar was the weakest performing major currency on Tuesday, reflecting widespread market belief that the Federal Reserve will adopt a dovish stance at its upcoming meeting. Traders appear to be acting in advance of the official announcement, selling the dollar in anticipation of lower interest rates.
Current market pricing suggests investors expect not only the immediate 25bp cut but also an additional 50 basis points of cuts by the close of the year. This high level of expectation introduces a significant risk. If the Fed's statement is less dovish than anticipated, or if it signals a pause after this cut, the dollar could experience a sharp and rapid reversal, moving higher.
The Fed's Balancing Act
The Federal Reserve faces a delicate situation. A 50-basis-point cut, while potentially appeasing political pressure, could signal to markets that the central bank is concerned about a severe economic downturn. Such a move might be interpreted as a sign of panic, potentially destabilizing markets. A more measured 25bp cut allows the Fed to provide stimulus while maintaining flexibility for future decisions.
Most analysts believe a 50bp cut is unlikely at this meeting. Such a move could be seen as confirmation that the Fed is reacting to external pressures rather than purely economic data, and it could trigger unnecessary alarm among investors about the health of the economy.
Euro and Swiss Franc Show Notable Strength
While the dollar weakened, other major currencies capitalized on the shift. The Swiss franc (CHF) emerged as the strongest performer, causing the USD/CHF pair to fall by 1% to its lowest point since January 2015. This level is historically significant, as it marks the period when the Swiss National Bank (SNB) famously removed the franc's peg to the euro.
The euro also demonstrated considerable strength, with the EUR/USD pair climbing to a high not seen in nearly four years. This rally was fueled by two primary factors: the broad-based weakness in the U.S. dollar and stronger-than-expected economic data from Europe.
German Economic Sentiment Improves
A key catalyst for the euro's rise was Germany's ZEW Economic Sentiment index, which came in at 37.3. This figure significantly beat market estimates of 25.3 and surpassed the previous reading of 34.7. This marks the fifth consecutive month of expansion for the index, placing it comfortably above its long-term average of 21.1.
The euro's 0.8% gain against the dollar was its best single-day performance in over three weeks. This upward momentum has brought key resistance levels, such as the highs from July and October 2021 near 1.1908, and the psychological 1.20 level, into focus for currency traders.
Technical Outlook for Key Yen Pairs
The diverging performance of the yen against different currencies has created interesting technical setups that traders are closely monitoring ahead of the central bank announcements.
USD/JPY Nears Potential Breakdown
For several weeks, the USD/JPY has been trading within a defined range, bounded by key weekly volume points of control (VPOCs). After multiple failed attempts to break out, recent price action suggests bears may be gaining the upper hand.
The pair recorded its lowest daily close within this range, accompanied by an increase in trading volume during the selloff. This combination indicates growing bearish conviction. A decisive break below the support level at 145.75 could open the door for a deeper decline toward the 144.00 area.
"With USD/JPY printing its lowest daily close of the range—and volumes rising during yesterday’s selloff—I am once again on guard for a bearish breakout," noted market analyst Matt Simpson.
On the 1-hour chart, bearish momentum accelerated as the pair fell from 147.50 to 146.52, with rising trading volumes confirming the move. The primary risk to this bearish outlook is a less-dovish-than-expected statement from the FOMC, which could trigger a rapid rally back into the established range.
EUR/JPY Bullish Trend Remains Intact
In contrast to USD/JPY, the trend for EUR/JPY remains firmly bullish. The daily chart shows the pair is on the verge of another potential breakout to the upside. After a correction, the price has established a higher low along its 20-day exponential moving average (EMA) and is now approaching the 174.00 handle and the July high.
The daily Relative Strength Index (RSI) confirms the underlying bullish trend. While some short-term indicators suggest the pair may be slightly overbought, the overall trend structure is strong. Bulls may view any minor dips or pullbacks as opportunities to enter the market, with an initial target at the 2024 high near 174.40.
AUD/JPY Shows Signs of a Pullback
The Australian dollar has been exceptionally strong against the yen, with AUD/JPY rising over 4% in the last three weeks. This rally included a remarkable 10-day winning streak, a feat not seen in 11 years. However, recent price action suggests this strong upward move may be due for a pause or a minor correction.
A bearish outside day formed on Tuesday, creating a three-day bearish reversal pattern known as an evening star. This suggests that some traders may be taking profits ahead of the Bank of Japan meeting. A pullback toward the July high of 97.43 or a high-volume node at 97.22 is now a possibility. Despite this potential for a short-term dip, the broader bullish trend remains strong, and many traders will likely see a retracement as a chance to buy at a more favorable price.
