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USD/JPY Snaps Bearish Series- Outlook Hinges on Updated Fed Forecasts

USD/JPY Snaps Bearish Series- Outlook Hinges on Updated Fed Forecasts

2018-03-20 15:28:00
David Song, Strategist
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FX TALKING POINTS:

- GBP/USD Struggles as U.K. Consumer Price Index (CPI) Disappoints. U.K. Average Hourly Earnings in Focus Ahead of Bank of England (BoE) Meeting.

- USD/JPY Snaps Series of Lower Highs & Lows, Relative Strength Index (RSI) Extends Bullish Formation. Outlook Hinges on Updated Fed Forecasts.

DailyFX Table

BRITISH POUND STRUGGLES AS U.K. CONSUMER PRICE INDEX (CPI) DISAPPOINTS. AVERAGE HOURLY EARNINGS IN FOCUS AHEAD OF BANK OF ENGLAND (BOE) MEETING

GBP/USD Table

GBP/USD pares the advance from earlier this week as the U.K. Consumer Price Index (CPI) slows more-than-expected in February, and the pound-dollar exchange rate may continue to consolidate ahead of the Bank of England (BoE) meeting on March 22 as signs of easing inflation dampen bets for an imminent rate-hike.

The downtick in the headline and core rate of inflation may encourage the Monetary Policy Committee (MPC) to keep the benchmark interest rate at 0.50% as ‘developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook,’ and more of the same from Mark Carney and Co. may generate a bearish reaction in the British Pound as market participants scale back expectations for a BoE rate-hike in the first-half of 2018.

However, GBP/USD may face a more bullish fate ahead of the BoE as the Jobless Claims report is anticipated to show an uptick in Average Weekly Earnings, and the BoE may largely reiterate that ‘were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.’ In turn, the MPC may continue to prepare U.K. households and businesses for higher borrowing-costs, and a batch of hawkish rhetoric may fuel the advance from earlier this month especially as the pound-dollar exchange rate breaks out of a near-term holding pattern and looks to extend the upward trend carried over from late last year.

GBP/USD DAILY CHART

GBP/USD Daily Chart
  • Broader outlook for GBP/USD remains constructive as both price and the Relative Strength Index (RSI) preserve the bullish trends carried over from late last year, with the topside targets still on the radar as the pair appears to be breaking out of a wedge/triangle formation.
  • The close above 1.3970 (50% expansion) keeps the 1.4100 (100% expansion) handle in sight, with the next topside hurdle coming in around 1.4310 (61.8% expansion) to 1.4350 (78.6% retracement), which lines up with the 2018-high (1.4346).
  • However, a string of failed attempts to clear the 1.4100 (100% expansion) handle may spur range-bound conditions, with a move below the 1.3830 (61.8% retracement) to 1.2870 (78.6% expansion) region raising the risk for a move back towards 1.3690 (61.8% expansion) to 1.3700 (38.2% expansion).

USD/JPY SNAPS SERIES OF LOWER HIGHS & LOWS, RELATIVE STRENGTH INDEX (RSI) EXTENDS BULLISH FORMATION

USD/JPY Table

USD/JPY snaps the recent series of lower highs & lows after failing to test the monthly-low (105.25), with the near-term outlook clouded with mixed signals as the Relative Strength Index (RSI) extends the bullish formation carried over from the previous month.

Fed Fund Futures

With Fed Fund Futures highlighting a 94% probability for a 25bp rate-hike, market participants are likely to pay increased attention to the fresh forecasts from Chairman Jerome Powell and Co. as the central bank pledges to further normalize monetary policy over the coming months. Fed officials may move towards a more aggressive hiking-cycle as the ongoing improvements in the labor market dynamics are expected to boost wage growth, and an up revision in the longer-run forecast for the benchmark interest rate may heighten the appeal of the dollar as it boosts bets for four Fed rate-hikes in 2018.

However, ongoing forecasts for a longer-run rate of 2.75% to 3.00% may trigger a bearish reaction in the greenback as it suggest the Federal Open Market Committee (FOMC) will stick to the current script, and forecasts for three rate-hikes in 2018 may fuel the broader shift in USD/JPY behavior as the Bank of Japan (BoJ) starts to show a greater willingness to move away from its easing-cycle.

USD/JPY DAILY CHART

USD/JPY Daily Chart
  • USD/JPY stands at risk of facing range-bound conditions as it snaps the recent series of higher highs & lows following the failed attempt to test the 2018-low (105.25).
  • Still keeping a close eye on the Relative Strength Index (RSI) as it extends the bullish formation carried over from the previous month and now comes up against trendline resistance.
  • Need a break/close above the 106.70 (38.2% retracement) to 107.20 (61.8% retracement) region to bring the topside targets back on the radar, with the next region of interest coming in around 108.30 (61.8% retracement) to 108.40 (100% expansion) followed by the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion).

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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