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USD/JPY Bullish Momentum Unravels Ahead of U.S. NFP Report

USD/JPY Bullish Momentum Unravels Ahead of U.S. NFP Report

David Song, Strategist

FX TALKING POINTS:

  • USD/JPY Extends Post-FOMC Losses Following Lackluster ISM Non-Manufacturing Survey. Bullish Momentum Unravels Ahead of U.S. Non-Farm Payrolls (NFP) Report.
  • EUR/USD Hold Narrow Range as Euro-Zone Consumer Price Index (CPI) Disappoints. Relative Strength Index (RSI) Sits in Oversold Territory.
Image of daily change in major currencies

The U.S. dollar struggles to hold its ground following the Federal Open Market Committee (FOMC) interest rate decision as the central bank largely sticks to the current script, with the greenback at risk of giving back the advance from the previous month as market participants scale back bets for four rate-hikes in 2018.

USD/JPY EXTENDS POST-FOMC LOSSES FOLLOWING LACKLUSTER ISM NON-MANUFACTURING SURVEY

Image of daily change for USDJPY

USD/JPY remains under pressure following the Federal Open Market Committee (FOMC) interest rate decision as the ISM Non-Manufacturing survey narrows more-than-expected in April, and the pair stands at risk for further losses as the bullish momentum starts to unravel.

Image of Fed Fund Futures

Recent remarks from the FOMC suggest the central bank is in no rush to extend the hiking-cycle as ‘inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term,’ and it seems as though Chairman Jerome Powell and Co. will tolerate above-target price growth for the foreseeable future as ‘risks to the economic outlook appear roughly balanced.’ As a result, Fed Fund Futures are starting to show waning expectations for four rate-hikes in 2018, with the benchmark interest rate now anticipated to end the year around the 2.00% to 2.25% threshold.

In turn, market participants may pay increased attention to the U.S. Non-Farm Payrolls (NFP) report as Average Hourly Earnings are projected to hold steady at an annualized 2.7%, and another batch of lackluster data prints may fuel the recent decline in USD/JPY as it dampens the Fed’s scope to extend the hiking-cycle.

USD/JPY DAILY CHART

Image of USDJPY daily chart
  • USD/JPY stands at risk of carving a fresh series of lower highs and lows following the failed attempt to close above the 109.40 (50% retracement) to 110.00 (78.6% expansion) hurdle, with the Relative Strength Index (RSI) highlighting a bearish trigger as it snaps the upward trend carried over from the previous month.
  • Need a break/close below the 108.30 (61.8% retracement) to 108.40 (100% expansion) region to bring the downside targets back on the radar, with the next area of interest coming in around 106.70 (38.2% retracement) to 107.20 (61.8% retracement).

For more in-depth analysis, check out the Q2 Forecast for USD/JPY

EUR/USD HOLD NARROW RANGE AS EURO-ZONE CONSUMER PRICE INDEX (CPI) DISAPPOINTS

Image of daily chage in EURUSD

EUR/USD struggles to extend the advance from weekly-low (1.1938) as updates to the Euro-Zone Consumer Price Index (CPI) showed an unexpected slowdown in both the headline and core rate of inflation, with the exchange rate at risk for further losses as the Relative Strength Index (RSI) sits in oversold territory.

The below-forecast reading for inflation may encourage the European Central Bank (ECB) to carry the current policy into the second-half of 2018 as ‘measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend,’ and the Governing Council may see little scope to alter the forward guidance at the next meeting on June 14 as ‘an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term.

Keep in mind, President Mario Draghi and Co. appear to be on track to unveil a more detailed exit strategy later this year as the quantitative easing (QE) program is scheduled to expire in September, and a broader shift in EUR/USD behavior may unfold over the coming months as the ECB prepares to switch gears for monetary policy.

Nevertheless, near-term outlook for EUR/USD remains tiled to the downside following the dismal data prints coming out of the euro-area, with the exchange rate at risk for a further decline as long as the RSI holds below 30.

EUR/USD DAILY CHART

Image of EURUSD daily chart
  • The ongoing series of lower highs in the EUR/USD rate keeps the downside targets on the radar, with a break/close below the 1.1960 (38.2% retracement) to 1.1970 (23.% expansion) region raising the risk for a run at the 2018-low (1.1916).
  • Next region of interest comes in around 1.1810 (61.8% retracement) followed by the Fibonacci overlap around 1.1670 (78.6% expansion) to 1.1680 (50% retracement).

For more in-depth analysis, check out the Q2 Forecast for EUR/USD

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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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