Will USD/JPY break 112?

The market continues to doubt Federal Reserve’s resolve to tighten.  As the upcoming FOMC meeting in March draws nearer, will USD/JPY break through the key level of 112?

US data were encouraging and Fed officials have been talking about rate hike soon.  Fed are concern if they wait too long to tighten.  But traders are not convinced and they are displaying their sentiments in 2 areas.

1. USD/JPY heading lower and lower, it is at 112 key support.

2. Fed Fund futures indicating a 36% chance of rate hike in March and more than 60% chance of rate hike in May.

President Donald Trump had talked down the dollar strength and the effect is felt most by USD/JPY.  USD/JPY fell close to 300 pips since Trump’s inauguration and this was against the backdrop of possible rate hikes.  We can always give credit to Trump for weakening the dollar against the yen.  We will see a slew of US data this week, Core Durable Goods Orders, Prelim GDP, CB Consumer Confidence, ISM Manufacturing PMI, ISM Non-Manufacturing PMI and Unemployment Claims.  Trump will deliver his speech to congress and he is expected to reveal his “phenomenal tax cut plan”.  We expect Trump’s speech to overshadow the data.  If the tax cut plan is anything less than “phenomenal”, it is likely to be bad news for the greenback.  We will hear from various Fed officials, especially Fed Chair Yellen and Fed Vice Chair Fischer at the end of the week.  We foresee plenty of speculative moves on the dollar.

Political uncertainties in Europe

Brexit may become the trigger to a domino effect.  This is the concern of the market.  We have highlighted at the start of 2017, one of the main driver of the euro is political uncertainty.  French presidential election is drawing nearer and headlines are starting to hit the ground.  All eyes will be watching out for candidate Marine Le Pen.  Why?  She is an anti-EU and a possible initiator of “Frexit”!  Although the poll results are not showing she is a hot favourite as the next French president yet, but Trump has shown us anything is possible.  If Le Pen gains support in poll results closer to the date of election, this could light up the fire of populism again and traders will likely shun away from the euro.

On the other side of the Strait of Dover, Scotland is unhappy their opinions on Brexit will not be heard and their fate lies in the hands of UK prime minister Theresa May.  A majority of Scottish voted to remain in EU last year and now they are being “forced” to accept Brexit and whatever it may come.  Scottish government is looking into another round of referendum for independence.  If the referendum is confirmed, it is bad news for the sterling.

 

Our Picks

GBP/USD – Bearish.  A “phenomenal tax cut” and UK political uncertainty could push this pair lower.  Consider putting a pending Short below the round figure of 1.2400.

USD/JPY – Bullish.  We expect Trump’s tax cut plan to support the 112 level.  Consider going Long after a “phenomenal” plan is announced.

XAU/USD (Gold) – Bullish.  We continue to maintain our bullish bias.  Consider buying at dips around 1249.

Top News This Week (GMT+8 time zone)

US: Prelim GDP q/q.  Tuesday 28^th February, 9.30pm.

We expect figures to come in at 2.2% (previous figure was 1.9%).

Canada: Overnight Rate.  Wednesday 1^st March, 11pm.

We expect figures to remain unchanged at 0.5% (previous figure was 0.5%).

UK: Services PMI m/m.  Friday 3^rd March, 5.30pm.

We expect figures to come in at 53.9 (previous figure was 54.5).

 

Fullerton Markets Research Team

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