- The dollar’s NFP gains faded quickly as markets remain focused on CPI. A soft/in-line CPI should weigh on USD, while a hot core monthly CPI could trigger a hawkish repricing and give the greenback a boost. The yen’s recent strength is more likely driven by carry-trade deleveraging than BoJ repricing. September’s BoJ hike is already priced in, so forward guidance and the pace of future tightening will be key for USD/JPY.
FUNDAMENTAL OVERVIEW
The US dollar spiked to the upside on Friday after the US NFP report showed job growth in August almost tripling the consensus estimate of 56K. The dollar gains didn’t last long, though, as most of the NFP-driven moves got faded thereafter.
This happened because the market focus was not on the NFP report, but on the CPI. The market pays attention to the data that the central bank is focused on, and the Federal Reserve is currently focused on inflation.
In fact, just a day before the NFP report, Fed’s Waller mentioned that he would support keeping interest rates unchanged at the upcoming FOMC meeting, but a hot CPI would make him consider a rate hike.
This week, all eyes will be on the US CPI data. Unless, we get some surprising breakthrough in US-Iran relations, the price action will likely remain mostly rangebound or a bit positive for the greenback as traders at some point might start hedging into the CPI release.
A soft or in-line CPI will likely weaken the dollar as Fed’s Waller mentioned that he won’t consider a rate hike unless we get a hot CPI. Conversely, an upside surprise in core monthly inflation data will likely trigger another rally on a hawkish repricing.
On the JPY side, the currency reportedly strengthened on the back of a hawkish repricing following BoJ Takata’s comments. I remain sceptical that was the culprit, though, given that Takata has been the most hawkish member for a long time and there’s been minimal repricing in interest rate expectations by looking at overnight index swaps.
More likely, we’ve seen deleveraging in carry trades ahead of the BoJ rate decision given that short positioning on the yen has been pretty extreme.
BoJ Governor Ueda has also commented on monetary policy recently but didn’t offer anything new. In my opinion, his comments were actually a bit less hawkish as he mentioned that the BoJ will assess the cumulative impact of its previous rate hikes on the economy and stressed that they have already raised rates five times during the current tightening cycle.
Now, the September rate hike is already priced in, so that won’t move the market much. Traders will be focused on forward guidance and signals about the future tightening pace. The uptrend in USD/JPY is unlikely to change without a dovish repricing in Fed interest rate expectations or a faster BoJ tightening pace.
USDJPY TECHNICAL
ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that USDJPY broke below the key 155.00 support zone and extended the drop as the selling pressure increased. The major support around the 152.30 level should now be the next target. If the price gets there, we can expect the buyers to step in with a defined risk below the support to position for a rally into the 164.00 handle. The sellers, on the other hand, will want to see the price breaking lower to increase the bearish bets into the 150.00 level next.
USDJPY TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we now have a downward trendline defining the bearish momentum. If we get a pullback, we can expect the sellers to lean on the trendline with a defined risk above it to keep pushing into new lows. The buyers, on the other hand, will want to see the price breaking higher to pile in for a rally into the next major trendline around the 159.00 handle and increase the bullish bets on a break above the 155.00 resistance.
USDJPY TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, there’s not much we can add here as from a risk management perspective, the sellers will have a better risk to reward setup around the trendline and the 155.00 resistance, while the buyers will need a break above those levels to open the door for a reversal of the recent trend. The red lines define the average daily range for today.
UPCOMING CATALYSTS
On Thursday, we get the US PPI report and the US Jobless Claims figures. On Friday, we conclude the week with the US CPI report.
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