BoJ’s turn tomorrow

The USD lost ground against its counterparts yesterday. The weakening of the USD started early in the American session as the CPI rates came in lower than expected. The headline rate ticked down, while the core rate slowed down even further, both on a year-on-year level, while on a month-on-month level, headline inflation in the past month remained unchanged. All were perceived by market participants as a signal that inflationary pressures in the US economy have started to ease once again. Later in the American session, the Fed released its interest rate decision. The bank as expected remained on hold displaying a data dependence in its , yet the new dot plot in the bank’s economic projections moved higher, implying that Fed policymakers are prepared to keep rates high for longer supporting the USD. Yet in his press conference, Fed Chairman Powell stressed once again the bank’s data dependence. Overall, we note an intensification in the market’s expectations for the bank to start cutting rates in the September meeting after the release that may weigh on USD.

EUR/USD rose yesterday after bouncing on the 1.0740 (S1) support line. Given that the downward channel guiding the pair since the midst of last December was interrupted early in the month and at the same time the pair respects the S1, we tend to maintain a bias for the sideways motion of the pair to continue. Furthermore, we note that the RSI indicator neared the reading of 50 implying that the bearish sentiment of the market has faded away and currently market participants remain uncertain for the direction of the pair’s future leg. Should the bulls take over, we may see EUR/USD breaking the 1.0890 (R1) resistance line and aiming for the 1.1010 (R2) resistance level. On the flip side should the bears take over, we may see the pair breaking the 1.0740 (S1) support line and aiming for the 1.0615 (S2) support level.

We also continue to view BoJ’s loose monetary policy maybe as the main factor behind the weakening of JPY. Hence we highlight the release of the bank’s interest rate decision during tomorrow’s Asian session, as the main event for the week for JPY traders. The bank is expected by the market to keep rates unchanged and JPY OIS imply currently a probability of 83% for such a scenario to materialise. Hence the market’s attention is expected to turn towards the accompanying statement and its forward guidance. We do not expect a material shift in the bank’s stance, maybe a tweak towards the hawkish side which theoretically could provide some support for the JPY. Yet it remains doubtful if the bank could convince the markets about any hawkish intentions. Should the bank actually fail to convince the markets we may see the Japanese currency losing some ground against its counterparts.

USD/JPY corrected lower yesterday yet regained any losses during today’s Asian session. Overall the sideways motion of the pair seems to be maintained and we tend to keep our bias for the pair to continue to move in this direction. Furthermore, we also note that the RSI indicator, remains above yet close to the reading of 50, which is rather unconvincing for any bullish tendencies on behalf of market participants and tends to underscore a relative indecisive market. For a bullish outlook, we require that the pair breaks the 157.75 (R1) line and takes aim of the 160.35 (R2) level, which is an over thirty-year high and at such high levels the pair risks the possibility of a market intervention by Japan, to JPY’s rescue. Should a selling interest be expressed by the market, we may see the pair breaking the 154.60 (S1) level and start aiming the 151.90 (S2) level.

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Today we note the release of Eurozone’s industrial output for April and from the US, the weekly initial jobless claims figure and expect the release of the PPI growth rates for May to move the USD. On the monetary front, we note the speeches of BoC’s Deputy Governor Kozicki and Governor Tiff Macklem as well as NY Fed President Williams are scheduled to speak.