Monetary outlook differentials continue to weaken USD and favor JPY

The USD continued to weaken against its counterparts on Friday, as market expectations tend to intensify that the Fed is nearing the end of its rate hiking cycle and that interest rates may not go as high as previously expected. The market sentiment tended to get a boost from the slowdown of the US CPI rates for December, while comments made by a number of Fed officials seem to point towards a downshift in rate hikes for the bank’s next meeting. On the flip side, JPY continued to get support reaching a new seven-month high against the USD, as the market expectations are for BoJ to tweak its monetary policy even further towards the hawkish side in its next meeting on Wednesday.

Expectations seem to be concentrating on the possibility of the bank tweaking further its yield curve control policy or even abandoning it altogether. Furthermore, in the FX market, we also note the rise of the Aussie as it tested the psychological level of seventy cents against the USD, a level not seen since the end of August. It should be noted that the reopening of China, rose the expectations for more exports of raw materials towards the red giant, yet also the improved market sentiment, the weakening of the USD and a number of positive financial data from Australia tended to provide the necessary push for AUD. During tomorrow’s Asian session, we highlight the release of China’s GDP rate for Q4 and a possible slowdown could ease the grip of the bulls for the Aussie.

USD/JPY continued to be on the retreat yesterday breaking the 128.60 (R1) support line now turned to resistance. The pair’s price action tended to stabilize during today’s Asian session, breaking the downward trendline guiding it since the 12^th of January, forcing us to switch our bearish outlook in favor of a sideways movement bias. Yet the RSI indicator is still below the reading of 30, implying a bearish sentiment for USD/JPY in the market and thus may imply that the stabilization of the pair is temporary. Should the bears take over once again we may see the pair breaking the 126.50 (S1) line and aim for the 124.00 (S2) support level. If the bulls take the lead, USD/JPY could break the 128.60 (R1) line and aim for the 131.40 (R2) level.

AUD/USD was on the rise yesterday testing the 0.7010 (R1) resistance line, yet corrected lower. We tend to maintain a bullish outlook for the pair as long as the upward trendline guiding it remains intact. Should the buying interest be maintained, we may see AUD/USD breaking the 0.7010 (R1) resistance line and aim for the 0.7125 (R2) level. Should a selling interest be expressed, we may see AUD/USD breaking the 0.6900 (S1) support line and aim for the 0.6800 (S2) support base.      

Other highlights for the day:

Today in the European session, we note the release of Norway’s trade data for December, and in the American session Canada’s manufacturing sales growth rate for November, while the World Economic Forum in Davos, Switzerland is to begin.  

As for the rest of the week:

On Tuesday we get China’s GDP rate for Q4, UK’s employment data for November and Canada’s CPI rate for December. On Wednesday we highlight on the monetary front the release of BoJ’s interest rate decision and as for financial data we get Japan’s machinery orders for November, UK’s CPI rates for December, the US retail sales for December and the Industrial production for the same month. On Thursday we get from Japan the trade data for December, Australia’s employment data for December and from the US the weekly initial jobless claims figure and the Philly Fed Business index for January. On the monetary front, we note the release from Turkey of CBT’s and from Norway Norgesbank’s interest rate decisions. On Friday, we get Japan’s CPI rates for December, UK’s retail sales for December, Sweden’s GDP rate for December and Canada’s retail sales growth rate for November.

USD/JPY H4 Chart

Support: 126.50 (S1), 124.00 (S2), 121.50 (S3)

Resistance: 128.60 (R1), 131.40 (R2), 134.80 (R3)

AUD/USD H4 Chart

Support: 0.6900 (S1), 0.6800 (S2), 0.6630 (S3)

Resistance: 0.7010 (R1), 0.7125 (R2), 0.7265 (R3)

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