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Talking Points:

- USD/JPY Weakness to Persist on Cautious Fed Rhetoric.

- AUD/USD Initiates Bearish Series; Risks Larger Pullback Ahead of U.S. CPI.

DailyFX TableUSD/JPY

USD/JPY struggles to preserve the advance from the beginning of the year as the Bank of Japan (BoJ) reduced its purchases of long-term bonds under its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control, and the pair stands at risk of threatening the range-bound price action from December should a growing number of Fed officials adopt a cautious outlook for the U.S. economy.

With little details accompanying the BoJ announcement, the adjustment in the asset-purchase program may be a one-off event as inflation runs well below the 2% target, and fresh comments coming out of the Federal Reserve may ultimately sway the dollar-yen exchange rate as Minneapolis Fed President Neel Kashkari, Chicago Fed President Charles Evans, Dallas Fed President Robert Kaplan, St. Louis Fed President James Bullard, New York Fed President William Dudley, Philadelphia Fed President Patrick Harker and Boston Fed President Eric Rosengren are all scheduled to speak over the coming days.

Fed Fund Futures

Even though Fed Fund Futures highlight a greater than 60% probability for a March rate-hike, lackluster data prints coming out of the U.S. economy may encourage a growing number of central bank officials to strike a cautious tone as ‘some participants observed that there was a possibility that inflation might stay below the objective for longer than they currently expected.’ In turn, a slew of dovish rhetoric may generate a bearish reaction in USD/JPY, with the exchange rate at risk of falling back towards the bottom of its current range as market participants scale back bets for three Fed rate-hikes in 2018.

USD/JPY Daily Chart

USD/JPY Daily Chart

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  • USD/JPY appears to be stuck in a descending triangle, with the downside targets coming back on the radar as the pair snaps the series of higher highs & lows from the previous week.
  • Break/close below the 112.40 (61.8% retracement) to 112.50 (38.2% retracement) region raises the risk for a move back towards the monthly-low (112.06), with the next region of interest coming in around 111.10 (61.8% expansion) to 111.60 (38.2% retracement), which largely lines up with the December-low (111.41).
  • Closely tracking the Relative Strength Index (RSI) as it snaps the bullish formation from late-November, with the oscillator extending the bearish trend carried over from the summer months.

The near-term recovery in AUD/USD appears to have stalled ahead of the October-high (07836), with the pair at risk of giving back the rebound from the December-low (0.7501) as it starts to carve a series of lower highs & lows.

It seems as though the recent resilience in AUD/USD has run its course as the Relative Strength Index (RSI) finally falls back from overbought territory, but key developments coming out of the U.S. may spark a bullish reaction in the aussie-dollar exchange rate as the Consumer Price Index (CPI) is anticipated to slow to an annualized 2.1% from 2.2% in November. Even though the core rate of inflation is expected to hold steady at 1.7% per annum, signs of subdued price pressures may produce headwinds for the greenback as it rattles bets for an imminent Fed rate-hike. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

AUD/USD Daily Chart

AUD/USD Daily Chart
  • AUD/USD may threaten the monthly opening range as it carves a bearish sequence, with the lack of momentum to hold above the 0.7850 (38.2% retracement) to 0.7860 (61.8% expansion) threshold raising the risk for further losses especially as the Relative Strength Index (RSI) slips below 70 and flashes a textbook sell-signal.
  • First region of interest comes in around the 0.7720 (23.6% retracement) to 0.7770 (61.8% expansion) region, with near-term support sitting around 0.7650 (38.2% retracement).
DailyFX Calendar

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--- Written by David Song, Currency Analyst

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