FX Watch: USD/SGD back at Feb 2023 level, USD/JPY struggled at trendline resistance

All eyes on Fed Chair Jerome Powell at Jackson Hole

The cool-off in the aftermath of a V-shaped recovery over the past weeks and some reservations leading up to the upcoming Federal Reserve (Fed) Chair Jerome Powell’s speech at Jackson Hole translated into a pullback for Wall Street overnight. With a dovish Fed heavily priced by markets, there are now some lightening up in positioning just in case the Fed Chair failed to deliver.

The US dollar found room to stabilise but remains on track for its fourth straight week of losses. Treasury yields headed higher, with the US two-year yields gaining 8 basis points (bp), which may drive the larger unwinding in concentrated tech positions. Notably, the VIX also gained close to 8%, which reflects increased hedging activities as a sign of market caution.

The waiting game now begins as the economic calendar is bare to end the week, which leaves sentiments highly sensitive to Fed Chair’s upcoming policy guidance. Reinforcing the path towards a September rate cut is the bare minimum expected of him and markets will be on the lookout for more. He is likely to leave room for policy flexibility by refraining from giving any hard commitments, but a dovish takeaway may be Jerome Powell acknowledging that more rate cuts may be on the horizon if economic conditions continue to move in line with projections. A hawkish takeaway may be an emphasis on economic resilience and opening the door for a potential cut-and-hold.

USD/SGD: Will we see a new multi-year low?

The USD/SGD has been dragged to its lowest level since February 2023, as dovish Fed rate bets remain a weighing block for the US dollar. The pair is attempting to stabilise for now, but any near-term bounce may likely find resistance at the 1.317 level. Oversold technical conditions may only offer that much upside, facing off with a sustained policy easing from the Fed ahead.

Any break below the 1.303 level may be significant, which will mark its lowest level since 2014. That may pave the way for the pair to retest the 1.282 level next. For now, its monthly relative strength index (RSI) has been struggling to cross back above the mid-line since 2022, which does not offer much reassurances for the bulls just yet.

USD/JPY: Struggled at trendline resistance amid broader downward bias

Following a breakdown of a key upward trendline at the start of the month, a move back to reclaim the trendline has failed to materialise, with the pair retracing 2.5% over the past week. Its daily RSI continues to trade below the mid-line, which kept the bias on the downside, with any move lower likely to leave the 140.53 level on watch next.

The different policy path between US Fed and the Bank of Japan (BoJ) will continue to be a key theme over the coming year, as US-Japan 10-year bond yield differentials are dragged to its lowest level since April 2023, with further narrowing likely to see an in-tandem move lower in the USD/JPY.