Fed Chair Powell’s upbeat testimony took the limelight in markets overnight which supported the US dollar index and indeed sending USD/JPY on the warpath, advancing towards the 2018 high but not quite over the line, failing below the 113 handle. However Tokyo has picked up the batton and bulls have scored territory through 113 the figure, scoring a high of 113.08 so far.
However, although Powell reiterated that, “for now – the best way forward is to keep gradually raising the federal funds rate,” ‘gradual hikes’ is hardly a new theme for markets and indeed the 10-year yields were reflecting that, ranging sideways between 2.85% and 2.87%. What does appear to be happening is the yen is losing its safe-haven status to the Swissy and the US dollar and bears are stepping aside, enabling the pair to move higher. Additionally, the 2yr yields, which are arguably more sensitive to rate talk and US data, climbed from 2.59% to 2.61% which was the highest level since 2008. The Fed fund futures yields continue to price 1 ½ more hikes in 2018 as well.
Powell remains upbeat
On the economy, while Powell was upbeat overall against a firm global backdrop and noting how and tax cuts are beneficial, there was an air of caution where he noted uncertainties on trade policy, “it is difficult to predict the ultimate outcome of current discussions”.
Meanwhile, there is a fundamental case for a strong dollar currently. We had recent retail sales revisions that were strong and overnight, we had the latest US industrial production which jumped a solid 0.6% in June. However, analysts at Westpac noted that there was also a large 0.4ppt downward revision to the prior month, “taking May’s reading to -0.5%, portrays a less impressive picture. Most of June’s gain came from rebounding motor vehicle production which had fallen sharply in the prior month due to supplier disruptions. The National Association of Homebuilders sentiment survey held steady at an elevated 68.”
USD/JPY levels
Valeria Bednarik, chief analyst at FXStreet explained that in the 4 hours chart, technical indicators regained the upside, with the Momentum indicator heading north well above its mid-line and the RSI partially losing upward strength around 71:
“In the mentioned chart, moving averages are finally gaining upward traction, although far below the current level to be relevant in the near term. Pullbacks should remain contained around 112.60 to keep the positive tone alive, while above the 113.00 level, the mentioned yearly high is the main resistance/bullish target.”