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
USDJPY – daily
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
USDJPY – 4 hour
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
USDJPY – 1 hour
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.
