FUNDAMENTAL OVERVIEW
USD:
The US dollar weakened across the board on Thursday after Trump cancelled the planned attacks on Iran and announced a deal to be signed in the following days. As a result, Fed rate hike expectations got pared back immediately with the market now pricing in 16 bps of tightening by year-end compared to 24 bps before the deal announcement.
In the short-term, the focus will be on this new development as oil prices fall and inflation concerns ease. On Wednesday, we have the FOMC rate decision where the Fed is expected to keep interest rates unchanged and drop the easing bias. The Fed will also release the latest economic projections and the dot plot.
The market might forgive some hawkish tone from the Fed decision in light of this new development but not if the central bank places more weight on economic strength rather than easing inflation expectations.
Looking ahead, oil prices will likely continue to fall and might reach pre-war levels. The risk then is that the negative supply shock turns into a positive demand shock that boosts economic activity further requiring rate hikes anyway. For now, the markets can celebrate.
JPY:
On the JPY side, the currency strengthened against the US dollar but remained weak against the other major currencies amid the positive risk sentiment. The BoJ is expected to hike by 25 bps tomorrow bringing the policy rate to 1.00%. The central bank is also expected to announce a pause to the bond tapering programme from next fiscal year.
The US-Iran deal and lower oil prices will likely increase economic activity and might strengthen the case for further tightening in the second half of the year. The focus tomorrow will be on forward guidance but keep in mind that Governor Ueda got hospitalised so he will advise the committee remotely but won’t participate in the voting process. The press conference will be held by deputy governor Uchida.
USDJPY TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that USDJPY we can see we got a pullback after the US-Iran deal announcement and the price got consolidated ever since. The natural target remains the cycle high around the 162.00 handle but a more hawkish than expected BoJ could trigger a bigger pullback into the 158.00 support.
USDJPY TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see the minor upward trendline continues to act as support. We can expect the buyers to continue to lean on the trendline with a defined risk below it to keep pushing into new highs. The sellers, on the other hand, will want to see the price breaking lower to pile in for a drop into the 158.00 support next.
USDJPY TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we can see more clearly the recent consolidation with the price action forming a symmetrical triangle. The buyers will want to see the price breaking above the downward trendline to increase the bullish bets into new highs, while the sellers will continue to lean on it to keep targeting a break below the upward trendline. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Tomorrow, we have the BoJ rate decision. On Wednesday, we have the FOMC rate decision. On Thursday, we get the latest US Jobless Claims figures. On Friday, we conclude the week with the Japanese CPI report.
