March’s US Core PCE prices in focus

The USD edged lower against its counterparts yesterday, probably being set under selling pressure by the slower-than-expected preliminary GDP rate for Q1. The release of the GDP rate for Q1 implied that the US economy grew at a slower pace than initially estimated probably also given the tight financial environment in the US as the Fed’s rates remain high. We turn our focus now to the release of the US Core PCE price index for March in an effort to gauge the tendencies of inflation in the US economy. Please note that the rates are the Fed’s favourite inflation metric and hence a possible failure of the rates to slow down may add more pressure on the Fed to maintain its rates high for longer, thus supporting the USD. On the flip side should the rates slow down more than expected, we may see the market selling the Dollar as the release may provide more leeway for Fed doves to start arguing for a rate cut with more confidence. The release is expected to have ripple effects beyond the FX market, probably also on US stock markets and gold’s price.

EUR/USD appears to be moving in an upwards fashion. We maintain a bullish outlook for the pair, while we also note that the RSI indicator below our daily chart reached the reading of 50, implying that the bearish sentiment has been erased. For our bullish outlook to continue, we require a break above the 1.0740 (R1) resistance line, which is now being put to the test, with the next possible target for the bulls being the 1.0890 (R2) resistance level. Yet should the pair stabilise we may see EUR/USD failing to break the 10740 (R1) resistance ceiling and correcting lower, but respecting the 1.0615 (S1) support line. Lastly, for a bearish outlook we would require the pair to clearly break below the 1.0615 (S1) support line, with the next possible target for the bears being the 1.0450 (S2) support base.

Also in the FX market, BoJ released its interest rate decision during today’s Asian session and as was widely expected remained on hold, keeping rates at 0-0.1%. Also, the bank highlighted its conviction that inflation rates are to remain near the bank’s targets, in a rather optimistic note. The bank also tended to signal that it’s prepared to hike rates further near the end of the year. Yet at the same press conference BoJ Governor Ueda also stated that the bank is to maintain easy financial conditions for the time being. Overall, the lack of clear forward guidance, given that the accompanying statement was exceptionally short, even for BoJ’s standards, tended to weaken the JPY further. We also note that Tokyo’s CPI rates slowed beyond market expectations, in another sign of easing inflation and the possibility of a market intervention to JPY’s rescue, is now clearly on the horizon. Yet with a continuance of the BoJ’s loose monetary policy any positive effects of a market intervention by the Japanese government may be short-lived.

On a technical level, USD/JPY breached the 153.80 (S1) resistance line, now turned to support. We tend to maintain a bullish outlook for the pair, given its upward movement since the 11 of March, which is being underscored by the upward trendline guiding it. We also note that the RSI indicator is far higher above the reading of 70, which on the one hand highlights the strong bullish sentiment of the market for the pair, yet at the same time warns that the pair is at overbought levels and ripe for a correction lower. Similar signals are also send by the fact that USD/JPY’s price action is nearing the upper Bollinger Band. Should the bulls maintain control as expected, we may see USD/JPY aiming if not breaching for the 158.35 (R1) line, a level that has not seen any price action since 1990. On the flip side for the adoption of a bearish outlook, we would require the pair to reverse direction, break initially 153.80 (S1) support line, break the prementioned upward trendline in a first signal that the upward motion has been interrupted, and also break the 151.90 (S2) level, yet even then the pair’s price action would be within the boundaries set by the upward channel incepted since the mid of December last year.

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Today we get France’s Consumer confidence for April, and later we are also getting the US Consumption rate for the same month and April’s final UoM consumer sentiment.