FUNDAMENTAL OVERVIEW
USD:
The US dollar has been consolidating against most major currencies since Monday. The US CPI report yesterday came mostly in line with expectations and helped alleviate some of the most hawkish fears. The market pricing hasn’t changed though as traders continue to price in 24 bps of tightening by year-end, down very slightly from 25 bps seen before the CPI release.
As mentioned previously, we can now expect the Fed to drop the easing bias at the upcoming meeting, but the focus will be mostly on the dot plot and forward guidance. Even though a rate hike is now fully priced in, if the Fed endorses the market pricing, it will effectively confirm that the bias has now shifted to tightening and might trigger another rally in the greenback.
The question for markets is now when and how many rate hikes the Fed might deliver by year-end. The US-Iran standoff doesn’t look like it’s going to resolve anytime soon, so that’s going to keep energy prices elevated and force the Fed to act.
JPY:
On the JPY side, a rate hike next week is now a done deal after several leaks from major newswires. That’s how the BoJ signalled upcoming policy actions in the past. The central bank is also expected to pause its bond tapering plan from next fiscal year, which kind of removes the hawkish flavour of the rate hike as conditions will remain accommodative.
This rate hike looks driven more by the weakening Japanese yen as inflation trends haven’t been calling for a rate hike at all. In light of this, the BoJ might deliver a dovish hike which is likely to keep weighing on the currency.
The market is pricing in an 88% chance of a hike next week with a total of 45 bps of tightening by year-end.
USDJPY TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that USDJPY continues to slowly edge higher and it has now basically erased the entire drop since April. The natural target should be the cycle high around the 162.00 handle. If we get there, we can expect the sellers to step in with a defined risk above the cycle high to position for a correction into the major trendline. The buyers, on the other hand, will look for a break higher to increase the bullish bets into new highs.
USDJPY TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we have a minor upward trendline defining the bullish momentum. If we get a pullback into the trendline, we can expect the buyers to lean on it with a defined risk below it to keep pushing into new highs. The sellers, on the other hand, will look for a break to pile in for a drop into the 158.00 support zone.
USDJPY TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we have another minor upward trendline on this timeframe. The buyers will likely continue to lean on it with a defined risk below it to keep pushing into new highs, while the sellers will look for a break to extend the pullback into the next trendline. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Today, we get the latest US Jobless Claims figures and the US PPI report. Tomorrow, we conclude the week with the University of Michigan consumer sentiment survey.
