- Buy orders now take up 70% of the market
- Percentage of long positions is at the same level as yesterday—58%
- Focus in the near term is on the Sep 10 high at 121.32
- Support is at 120.25, represented by the 200-hour SMA and falling trend-line
- 78% of traders see the Dollar higher than 120 yen on Dec 17
- Upcoming events: FOMC Statement, Philly Fed Manufacturing Index (Sep), Building Permits (Aug), Unemployment Claims, BoJ Meeting Minutes
Tuesday's gains were negated by yesterday's sell-off across the board. The US Dollar fell 1.09 and 1.04% relative to the Pound and the Aussie respectively. The Greenback rose solely versus the Japanese Yen, though the rally was shallow, merely 0.10%.
Consumer prices in the US declined in August as cheaper gasoline kept inflation below the targeted level of the Fed. The US consumer price index dropped 0.1%, the first decline since January, following a mere 0.1% gain in July, according to the Labor Department. Measured on an annual basis, CPI rose just 0.2% in August. A 15% decrease in energy costs over the past 12 months and a strengthening US Dollar are acting as a brake on inflation that the Fed views as temporary. However, the core measure, which excludes volatile fuel and food costs, climbed 0.1% in the reported month. The core inflation rate over the past twelve months remained at 1.8% in August.
The data came just a day before the Fed's much anticipated rate decision. Fed Vice Chairman Stanley Fischer recently said that the low inflation was mostly owed to the falling oil prices in addition to a rising Dollar and "ongoing economic slack." Fischer noted, however, that Fed policymakers remain "reasonably confident" that inflation will reach their target levels. However, there are a number of economists, who doubt Fed's confidence, saying that the Fed has been overconfident about inflation in the past. Nonetheless, if the Fed waits too long, then inflation may rise to higher than the target rate of 2% causing deeper concerns of economic instability.
Craig Erlam, Senior Market Analyst at OANDA, commenting on the prospects of the Fed raising interest rates this year, said that there is no real difference between the Fed raising rates either in June or in September. In his opinion September just seems more likely, because it gives the Fed more time to prepare for the hike. Craig also does not see the immediate necessity for a rate hike in September, but thinks that "there is just a number of policymakers who want to test the water with the first hike, see how the markets react, how economy holds up."
In response to the latest Bank of Japan meeting, Stuart Allsop, head of financial market strategy at BMI Research, said that no action from the central bank was expected and that they are likely to "refrain from doing any more stimulus this year". However, he noted that "the risks have increased".
Concerning the GDP growth, the analyst doubts that it will "get above 1% anytime in the foreseeable future". The reasons for this are manifold. First, there is "a huge headwind in terms of demographics". Additionally, there is a decline in growth of China coupled with global economic slowdown. However, the main negative factor provided by Allsop is a "very unstable production structure". He explains that the real interest rate is negative, which is "sending contradictory signals to the real economy", and this in turn leads to a low chance of "a productivity boom".
As for the Japanese Yen, Allsop is bullish on the currency. In his opinion there are two main contributing factors. The first one is that "investors lose faith in the willingness of the BoJ to act. At the same Allsop adds that the Yen has proven recently its status as a global safe have, and this is beneficial for the value of the currency being that "global financial markets are looking quite shaky", which is negative for the risk sentiment. At the same time, the analyst mentioned that USD/JPY "may fall quite significantly in the coming months", and if this is the case, "this would raise the prospects of intervention from the BoJ".
The day has come
The long-awaited and thoroughly discussed day has finally come. And although recently the chances of a rate hike by the Fed have fallen below 50%, they remain substantial, meaning regardless of the decision reaction of the market is expected to be notable. However, we should not forget releases that are to be published before the climax at 6 pm GMT. There is going be be a bunch of the US data 30 minutes after the noon: building permits, weekly unemployment claims and current account. Additional risk event, represented by the Philly Fed manufacturing index, is scheduled at 2 pm GMT. After the storm calms down, the Bank of Japan is expected to publish the monetary policy meeting minutes 10 minutes before the midnight.
Steve Lucas, technical analyst at 3CANALYSIS, gives his perspective on the USD/JPY currency pair:"we have persistently been bullish of USD/JPY, but in the very short-term we think there will be a pullback". Steve explains the forecast by mentioning that after the pair posted the 12.5-year high in June, there is now a negative signal in the form of a bearish reversal candle. "We also think that the deception out there is that the Fed is going to be a little easier on raising interest rates and people are going to be a bit cautious and a bit sensible and take the money off the table", the analyst added.
USD/JPY stays between weekly and monthly PPs
Unlike in the pair with the British Pound the Dollar appreciated versus the Yen yesterday. USD/JPY is currently testing the monthly pivot point, but we are still inclined to believe that the rate will fail to gain a solid foothold above 120.85, mainly because of the 200-day SMA that stands nearby, namely at 121.24. We consider the probability of a sell-off toward a notable support level at 118.50 as a more likely scenario.Daily chart
Although at first it seemed that the currency pair confirmed the falling resistance line, yesterday around noon we saw a break-out to the upside. As a result, the focus in the near term is now on the Sep 10 high at 121.32, which is close to the 200-day SMA. Above this we have the Aug 28 peak at 121.73.
Hourly chart
Sentiment stays bullish
At OANDA and SAXO Bank the shares of longs increased. In the first case from 55 to 57%, in the second from 58 to 60%, revealing growing conviction of the market participants across the brokers in the ability of the US Dollar to outperform the Japanese Yen.
Spreads (avg, pip) / Trading volume / Volatility
78% of traders see the Dollar higher than 120 yen on Dec 17
Average Dukascopy website visitor expects the US Dollar to cost almost 2 yen more in three months' time. More than a fifth of survey participants (22%) estimates that the Greenback will be worth between 121.50 and 123 yen by the mid-December. At the same time it is worth mentioning that 66% of the forecasts are above 121.50 and 78% of the given forecasts are set above the level of 120 yen.
According to the latest survey, a majority (54.5%) of the Dukascopy Community members prefer to be short the Dollar against the Yen this week.
However, one of the poll participants, aslamhammad, reckons that "technically, price is trying to recover back to the highs", and expects the exchange rate to increase by the end of the week. On the other hand, csan86 notes that "there is a huge double bottom on weekly and daily chart, so there is a high possibility for a breakout from the triangle pattern on the downside", in which case he expects "more bearish movement at least to the 116.150 area".