- USD/JPY: Unable to sustain a rally through critical Fibo resistance.
- Trade tensions cooling, for now, the focus is on US data and the Fed.
- All eyes turn to US CPI ahead of the Fed.
USD/JPY reinstated its southerly trajectory on Tuesday following a run to the upside that occurred in Asia with follow through in European markets. The pair was capped at 108.80 and resumed back to the top of the hourly cloud and support, albeit, currently trading below short term trendline support est. 7th and 10th June.
Federal Reserve Chair Powell recently stressed that the central bank was “closely monitoring” the impact of trade tensions on the US economy. However, the general consensus is that trade relations will get back on track, but until Xi and Trump meet at the G20 later this month, its anyone's guess. Instead, the markets will focus more so on data and the Fed. Indeed, any further evidence that rising global headwinds are adversely impacting US domestic demand would intensify pressure on the Fed to cut rates, possibly this summer.
Meanwhile, sentiment has indeed improved as major global centalbanks turn more accommodative, (bar the BoE that has turned up with a more hawkish rhetoric). However, while that is beneficial to risk, and therefore troublesome for the yen, the dollar is also suffering from the sentiment given that the Fed-related support that the dollar had enjoyed for so long ha snow been swept away from beneath it.
CPI ahead of Fed next week
We are now in a media blackout period ahead of the Fed decision next week, so the majority of the bets have been laid and priced into the dollar, with partial market expectations for a Fed cut, perhaps as soon as this meeting around. However, we still have this week's data to go which come as US CPI tomorrow and US retail sales the following day.
"We look for headline CPI to slow two tenths to 1.8% in May — a tenth below consensus — on the back of a mild 0.1% seasonally-adjusted monthly increase. Core inflation, on the other hand, should remain steady at 2.1% y/y, reflecting a firm 0.2% m/m advance,"
analysts at TD Securities look for, adding:
"With the Fed pointing to low inflation (albeit temporary according to some members) as a possible cause — alongside developments in trade — to reconsider the Committee's interest rate outlook, we will be watching CPI closely."
Valeria Bednarik, the Chief Analyst at FXStreet explained that "the USD/JPY pair practically filled the weekly opening gap, giving bulls a slightly encouraging signal, although an upward extension through the mentioned critical resistance area, (108.65 Fibonacci resistance), is needed to confirm further gains ahead:
"Technical readings in the 4 hours chart offer a neutral-to-positive stance, as the price holds above its 20 SMA, which have lost its bullish strength and stands pat a couple of pips above the mentioned Fibonacci support, while the Momentum indicator eases within positive levels and the RSI heads nowhere around 53. The risk will turn to the downside only with a break below 107.90, unlikely in the short-term."
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