USD/JPY squares up to 150, S&P 500 hits ATH ahead of US inflation

The Fed minutes revealed that their decision to cut by 50bp in September was not unanimous, which further supports the likelihood that they’ll continue to ease in 25bp increments going forward, unless US economic data takes a turn for the worse. However, as we know, data generally surprises to the upside as the consensus view is too pessimistic for the reality of the economic situation. The US economy remains robust despite signs of it slowing gradually.

Of course, the latest set of NFP figures which blew past expectations now has many on edge for a hotter-than-expected inflation print later today. That, alongside the less-dovish-than-expected Fed minutes sent US yields higher with the USD, which was the strongest FX major on Wednesday.

The S&P 500 reached a record high on bets of less Fed cuts and a robust US economy, and the Dow Jones looks like it wants to follow suit. Even if CPI comes in hot, it seems unlikely to derail the bullish trend of Wall Street. Although might trigger a bump at the highs.

NZD/USD was the weakest FX major and closed well beneath its 200-day average for the first time in nearly two months after the RBNZ delivered a dovish 50bp cut. The central bank acknowledged subdues economic activity, low production growth, excess capacity in the economy and lower import costs. But most importantly they tipped their hat to market pricing which hints that another 50pp cut is to follow in December.

Gold is currently lower for a second week, but I suspect buyers are lurking and keen to snap up a bargain - so I'm not expecting a significant selloff. Gold prices could get a nice bump if CPI comes in soft, but whether it can reach a new high this year requires US data in general to underperform. I'm just not sure it will. And that means we could be looking at a choppy end to the year for gold prices, where buyers support dips but repeated record highs are not yet assured. 

Events in focus (AEDT):

US CPI is the main event, and eyes will be on the monthly core CPI print which rose 0.3% m/m in August. The consensus estimate has it softening to 0.2%, so anything above here could rattle Wall Street indices and further support the USD dollar. Whereas 0.2% or lower could send the Dow Jones to a record high and shake a few USD bullish bets out of their positions.

• 10:50 – JP PPI, bank lending, foreigner bond and stock purchases
• 11:00 – AU building approvals
• 14:35 – JP 5-year JGB auction
• 23:30 – US CPI, real earnings, jobless claims
• 00:15 – Fed governor Cook speaks
• 02:00 – FOMC member Williams speaks

USD/JPY technical analysis:

The bullish trend structure on the daily chart for USD/JPY is solid, with RSI (14) confirming the rally without a bearish divergence or being overbought. A small bullish pinbar on Tuesday held above the 147.18 high and was followed by a clear bullish range-expansion day. Prices are now testing the August high and considering a breakout.

The 1-hour chat shows the bullish trend is bouncing along the 20-hour EMA, Wednesday’s low perfectly respected the monthly R1 pivot, and the monthly R2 pivot lands right on the 200-day average, weekly R1 pivot

And 151 handle – making the area a potential target for bulls. Also note that August and July lows sits just beneath the 152 handle.

I suspect USD/JPY could break above 150 on pre-emptive bets of a hot US CPI report. Whether it breaks and holds above 151 is likely down to how the figures land, but with such a strong bullish trend on the daily then dips seem more likely to be bought than not at this stage.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge