Well, we’re getting nicely into the summer months now but trading is far from the typical quiet action we see over the summer. This week we’ve had plenty of noteworthy moves once again and, talking with traders ahead of the weekend, it seems the big move everyone is focused on is the breakout in the US Dollar. In terms of specific pairs, the breakout to 20-year highs in USDJPY has been the focus point. So, let’s take a look at what caused the move and, as ever, if you caught it? Well done! If you missed it? There’s always next week!
What Caused the Move?
US CPI Runs Hot
The US Dollar started the week strong on the back of a stronger-than-expected US jobs report the prior Friday. With the headline NFP coming in well above expectations, focus was kept firmly on Fed tightening expectations for July with traders looking for a .75% hike, same as June. However, into the middle of the week USD was boosted higher still by the JUNE CPI report which, again, came in above expectations.
Increased Fed Tightening Expectations
Annual US CPI was seen hitting forty-year highs in June of 9.1%. With both core and headline readings seen rising above estimates on the monthly data, Fed tightening expectations were further amplified with traders now juggling the prospect of a larger 1% hike, as we saw from the BOC on Wednesday. The US Dollar was sent firmly higher on the back of the data which was also seen as quashing any prospect of a post-July rates pause from the Fed. The fresh uptick in US CPI was seen as a new catalyst for USD demand and has rejuvenated buying in the greenback.
BOJ Committed to Maintaining Easing
At the same time that Fed tightening expectations are blowing up, the market’s expectations with regards to the BOJ remain firmly anchored in easing territory. The BOJ continues to reaffirm its commitment to easing and its view that the Japanese economy is not yet strong enough to withstand monetary policy tightening. With clear divergence in the monetary policy outlook (and expectations) between the Fed and the BOJ, USDJPY has taken off on a fresh rally.
Looking ahead, the market will now be waiting to assess the strength of today’s US retail sales data. We heard from Fed’s Waller yesterday that he would likely support a larger than .75% hike if today’s retail data was strong also and so for now, all eyes are on the data. A further strong release should see USDJPY continue higher into next week while even a miss will likely allow JPY some room to breathe ahead of the FOMC.
Technical Views
USDJPY
The breakout in USDJPY this week has seen the pair trading above the 136.88 highs. With the market still moving within a clear bullish channel, while this level holds as support, the focus is on a continuation higher with 146.97 the longer-term goal. To the downside, the channel lows and the 134.39 level are the key supports to note.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
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Written by James Harte
With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.
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Source: Tickmill
