USD/JPY Forecast: Consolidation with downside bias ahead of Fed

USD/JPY tanked nearly two big figures in the volatile Asian trade on Tuesday after markets became disappointed with the size of the stimulus program in Japan. The currency pair found support at 103.99 and recovered to 104.62 levels by day end closing on the back of better-than-expected US consumer confidence print.

The spot is likely to consolidate on caution ahead of the Fed rate decision. Asian economic calendar is light, while GDP release in the UK is unlikely to have a major impact on the broader market sentiment.

Later in the day, we have US durable goods release, which is expected to show pace of decline in corporate spending eased in June. This will be followed by pending home sales release. Durable goods report if positive could add to speculation the Fed may raise rates in December.

Fed to deliver a hawkish surprise?

With stock markets at record highs, there is actually very little in way of next Fed rate hike. Recent batch of economic data has been positive and the world has not come to an end after Brexit vote. Moreover, financial market instability ranks higher than economic data on Fed’s watch list. Hence, with stocks at record highs, the question is why isn’t Fed raising rates rather than when the Fed will raise rates? It remains to be seen if the Fed hikes rates this year as there is still election uncertainty ahead. Still, we may be in for a hawkish surprise today; more so because outright dovish view risks blowing an even bigger bubble in stocks than what is already seen.

Technicals – Re-test of 23.6% Fibo support likely

Daily Chart

• Despite dollar’s recovery from yesterday’s low of 103.99 to 105.12 the bias remains bearish, courtesy of failure followed by a drop from 106.64 (confluence of falling trend line + 38.2% Fibo level), but reckon the support at 104.19 (23.6% of 121.69-98.787) would remain intact.
• Failure to hold above 104.92 (76.4% of Brexit day high-low) would open doors for slide to 104.19 levels. 
• On the higher side, only a day end closing above 106.64 would suggest the corrective move has ended and the rally from post Brexit low has resumed.

AUD/USD Forecast: AU-US bond yield spread could narrow on weak Aussie CPI

Australian 2-year government bond yield currently has 82 basis point lead over its US counterpart. The 10-yr Aussie government bond has 39 basis point lead over 10-yr treasury yield.

Should the Aussie monthly CPI and core CPI release (due in half hour) disappoint expectations, the gap between Aussie and US yields would narrow. The 2-yr yield spread could narrow sharply indicating increased prospects of RBA rate cut in August and thus weigh over Aussie.

If the CPI beats estimates, the 2-yr spread could widen, although it may prove to be temporary if the FOMC comes out hawkish later today.

Technicals – weakness seen below session low

Daily Chart

• Despite Aussie’s rebound from 0.7450 (38.2% of 0.6827-0.7835) followed by a daily close back above rising trend line yesterday, the subsequent failure to hold above 10-DMA suggests consolidation with downside bias.
• Pair’s break below 0.7500 after having failed at 10-DMA earlier today could trigger a fresh drop towards 0.7450 levels, which if breached would open doors for 50-DMA at 0.7416.
• On the higher side, only a daily closing above 0.7571 (61.8% of 0.7835-0.7145) would signal a fresh rally towards 0.77 handle.

NZD/USD Forecast: Re-test of 0.70 handle likely

Daily Chart

• Despite NZD’s rally on Wednesday following a rebound from 0.6950 area, the subsequent failure at strong resistance zone of 0.7059-0.7076 (10-DMA + 23.6% of 0.6236-0.7326 + 38.2% of 0.6675-0.7325) followed by a rejection at the said levels in Asian session today suggests the currency is likely to re-test 0.70 handle.
• A violation at 0.70 handle on daily closing basis would open doors for a drop to 0.6924 (100-DMA) levels.
• On the higher side, only a day end closing above 0.7076 would signal a bottom is in place around 0.6950.