KVB Market Analysis | 2 October: USD/JPY Holds Recovery Gains Amid Improved Risk Sentiment

Product: USD/JPY

Prediction: Increase

Fundamental Analysis:

USD/JPY is holding its recovery gains below 144.00 in Wednesday's Asian session as risk sentiment improves following the Iran-Israel confrontation. However, market unease is capping further upside for the pair, with attention shifting to upcoming U.S. ADP jobs data and comments from the Federal Reserve.

The Fed's summary indicates no immediate plans for additional rate hikes, focusing instead on stability and cautious communication. The Bank of Japan aims to maintain its accommodative stance but is open to adjustments if economic conditions show significant improvement.

Japan's Tankan Large Manufacturing Index held steady at 13 in Q3, as expected. The unemployment rate dropped to 2.5% in August, beating forecasts. Dovish comments from incoming PM Shigeru Ishiba, stressing the need for low borrowing costs to support Japan's recovery, added pressure on the JPY.

Technical Analysis:

USD/JPY is trading around 144.10 on Tuesday. Daily chart analysis shows that the pair has re-entered the ascending channel pattern, suggesting that the bullish trend is still in place. The 14-day Relative Strength Index is just below the 50 level; a break above this could further confirm the bullish momentum.

For resistance, USD/JPY may target the upper boundary of the channel at 146.50, followed by its five-week high of 147.21 reached on September 3.

On the downside, immediate support is at the nine-day Exponential Moving Average around 143.51, followed by the channel's lower boundary at 142.80. A drop below this could push USD/JPY toward 139.58, the lowest point since June 2023.

Product: XAU/USD

Prediction: Increase

Fundamental Analysis:

Gold prices are edging lower, giving back some gains from the previous day, but the decline appears limited due to rising geopolitical tensions in the Middle East. Optimism about China's stimulus measures reviving physical demand could also support XAU/USD.

On Tuesday, gold slightly recovered to the $2,640s per troy ounce after Israel's ground invasion of Lebanon heightened safe-haven demand. 

However, gold's upside may be constrained by comments from Federal Reserve Chair Jerome Powell, who emphasised that the recent 50 basis point rate cut does not guarantee similar cuts in the future. Market expectations for a 50 basis point cut in November have fallen from over 60% to about 30%, as stronger economic data has reduced the likelihood of further major rate cuts, which typically weighs on gold prices.

Technical Analysis:

Gold is currently pulling back to the 50-period Simple Moving Average on the 4-hour chart. This correction has resulted in a series of lower lows and lower highs since the all-time high on September 26, raising doubts about the short-term uptrend for the precious metal.

While the market remains balanced, additional weakness could bring gold down to the trendline around $2,615-$2,620. A drop below Monday's low of $2,625 would confirm this bearish trend. If the trendline breaks, gold could continue to decline until it reaches stronger support at $2,600, followed by $2,550 and $2,544.

The Relative Strength Index is in neutral territory, indicating room for further downside. Despite this, gold remains in a medium- and long-term uptrend. A break above the all-time high of $2,685 would confirm bullish momentum, targeting $2,700 and $2,750 next.

Product: GBP/USD

Prediction: Increase

Fundamental Analysis:

GBP/USD dropped sharply on Tuesday, reaching its lowest level in over a week after disappointing U.S. ISM Purchasing Managers Index figures. Geopolitical tensions escalated as reports emerged of Iran firing on Israel, which further reduced risk appetite.

The pair is under bearish pressure, trading below 1.3350 after failing to stabilise above 1.3400 on Monday. Its technical outlook indicates a bearish trend in the near term. Although GBP/USD briefly rose above 1.3400 during European trading on Monday, it lacked momentum, and the U.S. Dollar held firm, erasing the pair's gains.

As of Tuesday, GBP/USD continues to decline with the USD recovering. Later, the U.S. will release JOLTS Job Openings data and the ISM Manufacturing PMI report. Powell noted that a drop in job openings below 7 million could weaken the USD, while a figure above 8 million might strengthen it, impacting GBP/USD accordingly.

Technical Analysis:

GBP/USD has fallen below the lower boundary of the ascending regression channel that has been in place since September 11. The Relative Strength Index on the 4-hour chart has also declined toward 40, indicating a bearish shift in the short-term outlook.

On the downside, 1.3300 serves as interim support, followed by 1.3275 and 1.3240-1.3230. If GBP/USD returns to the ascending channel by reclaiming 1.3350, the next resistance levels could be 1.3400 and 1.3440.