FX TALKING POINTS:

  • Crude Oil Prices to Stay Bid as Bullish Sequence Unfolds. Looking to Relative Strength Index (RSI) for Confirmation.
  • USD/JPY Risks Range-Bound Conditions Ahead of U.S. Consumer Price Index (CPI) as Bearish Formation Snaps.
Image of daily performance for major currencies

Crude trades above $70/bbl for the first time since 2014, with oil prices at risk of extending the advance from earlier this month as a bullish sequence unfolds. Meanwhile, the U.S. dollar regains its footing following the lackluster Non-Farm Payrolls (NFP) report,

CRUDE OIL PRICES TO STAY BID AS BULLISH SEQUENCE UNFOLDS

Image of daily change for oil

Crude remains bid as U.S. President Donald Trumpthreatens to withdraw from the 2015 Iran nuclear deal, and oil prices may continue to retrace the decline from back in 2014 as they breakout of a near-term range.

Image of US crude production

Even though U.S. field outputs sit at record-highs, renewed sanctions against Iran may keep oil prices afloat especially as the Organization of the Petroleum Exporting Countries (OPEC) and its allies keep the door open to carry the production-cutting pact into 2019. In turn, officials in Saudi Arabia may largely achieve their target of $80/bbl over the coming months, with increased turmoil in the Middle East likely to fuel the recent rally as both price and the Relative Strength Index (RSI) preserve the bullish trends from earlier this year.

Bear in mind, recent price action warns of extreme market conditions as the RSI approaches 70, and oil prices may exhibit a similar behavior as the start of 2018 should the oscillator push into overbought territory.

USOIL DAILY CHART

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  • Recent series of higher highs & lows keeps the topside targets on the radar, with a break/close above $71.30 (38.2% expansion) opening up the Fibonacci overlap around $72.70 (50% expansion) to $72.80 (100% expansion).
  • Need to keep a close eye on the RSI as it comes up overbought territory, with the indicator at risk of highlighting an extreme reading should it follow as similar path as in January.
  • However, lack of momentum to break above 70 may tame the recent advance in oil as the oscillator starts to diverge with price, with a move below the $68.60 (61.8% expansion) to $69.70 (23.6% expansion) raising the scope for a move back towards $67.30 (50% expansion).

For more in-depth analysis, check out the Q2 Forecast for Crude Oil

USD/JPY RISKS RANGE-BOUND CONDITIONS AHEAD OF U.S. CONSUMER PRICE INDEX (CPI) AS BEARISH FORMATION SNAPS

Image of daily change for USDJPY

USD/JPY stands at risk of facing range-bound conditions ahead of the key data prints coming out of the U.S. economy as it fails to retain the bearish formation from the previous week.

The dollar-yen rate pares the decline following the lackluster U.S. Non-Farm Payrolls (NFP) report even as Fed Fund Futures continue to highlight limited bets for four rate-hikes in 2018, and fresh comments from Atlanta Fed President Raphael Bostic suggest the central bank is in no rush to extend the hiking cycle as the 2018-voting member on the Federal Open Market Committee (FOMC) is ‘comfortable with some degree of overshooting the 2 percent target.’

Image of Fed fund futures

With that said, the FOMC may stay on course to further normalize monetary policy over the coming months, but Chairman Jerome Powell and Co. continue to project a neutral Fed Funds rate of 2.75% to 3.00% at the next quarterly meeting in June as ‘inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term.’

In turn, fresh updates to the U.S. Consumer Price Index (CPI) may do little to alter Fed expectations as both the headline and core readings are projected to show a minor uptick in April, and USD/JPY may stage a larger pullback over the coming days as the bullish momentum unravels.

USD/JPY DAILY CHART

Image of USDJPY daily chart
  • The string of failed attempts to break/close above the 109.40 (50% retracement) to 110.00 (78.6% expansion) may keep USD/JPY under pressure especially as the RSI fails to preserve the bullish formation carried over from the previous month.
  • May see price highlight a similar dynamic, with a break/close the 108.30 (61.8% retracement) to 108.40 (100% expansion) region to bring the downside targets back on the radar; first area of interest comes in around 106.70 (38.2% retracement) to 107.20 (61.8% retracement) followed by the 105.40 (50% retracement) region.

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

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--- Written by David Song, Currency Analyst

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