US Hawks vs Doves as Yellen speaks

It is all about the US dollar today.

The FOMC's Chair Janet Yellen will speak at the Jackson Hole Symposium at 3:00pm London time. Investors world-wide will be seeking and trading any piece of hint vis-à-vis the Federal Reserve (Fed)'s view over the US economy and the future of the US monetary policy.

The US dollar is a touch softer ahead of Yellen's speech. We expect high, and two-sided price volatility across the currency, equity and bond markets.

Expectations of a September rate hike in the US doubled over the past two weeks. Solid US jobs data, lighter fears about the Brexit, hawkish comments from several Fed members enhanced speculation that the September option is not fully off the table.

The world is wondering how Janet Yellen interprets the current macro situation, especially now that the US economy gives signs of solid recovery and that the major macro risk, the Brexit, is behind us.

In our view, Janet Yellen will certainly keep the highlight on the US economic performance and focus on the macroeconomic data, in order to keep the market alert and fully engaged in the Fed's decision-making process.

The Fed will be in a position to hike rates when the market will give the green light.
In this respect, the most rational way to play is through the economic data, which has printed rather satisfactory numbers over recent months.

As of today, the market gives a 32% chance for an interest rate hike to happen in the US. Although the pricing in the market is rather weak to allow the Fed to eventually act in September, the rising chances suggest that the next rate hike could come sooner rather than later. Yet, it appears that the Fed hawks will perhaps wait for next year, as the market gives a still insufficient 57% probability of a December rate hike.

Softer CPI to give BoJ further headache

Japan's consumer prices fell for the fifth consecutive month, yet bad news failed to revive the Bank of Japan (BoJ) doves. The yen traded range-bound near the 100 level against the US dollar, while Nikkei and Topix stocks lost 1.18% and 1.26% respectively. The market is being tough to the BoJ regarding its capacity to further loosen its monetary policy, or stay loose. Although the pool of sovereign bonds in Japan is drying up, the BoJ's shift toward alternative asset classes, as the ETFs, somewhat didn't satisfy the market expectations.

The monetary game in Japan has become very challenging given that the BoJ has gradually lost credibility and support from the market. It is time for the BoJ to surprise the insatiable market, yet Mr. Kuroda is running out of resources.

In the dirt of further visibility regarding Japan's monetary policy outlook, we should not rule out a potential slide in the USDJPY below the 100 level. Nevertheless, both the BoJ and the government are too implied in the yen's value. Therefore, despite the little maneuver margin in terms of fiscal and monetary policies, the upside risks in the USDJPY prevail, especially for a renewed attempt below the 100 level.
USDJPY: Golden cross alert on an hourly basis.

The USDJPY's trading range progressively narrowed over the past month. The 50-hour moving average has crossed above the 200-hour moving average (golden cross) for the first time in a month. The technical picture is suitable for a bullish breakout towards 100.58, the major 38.2% retracement on August 12 – 16 sell-off.