Bears awaken USD/JPY from its lull, Nikkei bulls eye bounce

Odds of a Fed cut arriving this year rose slightly following the release of Decembers CPI figures, which saw core inflation soften to a 6-month low of 0.2% m/m, compared with 0.3% expected and prior. This follows on from softer PPI figures earlier in the week.

Fed fund futures now imply a 44.7% chance of a Fed cut in Jube, up from 42.6 ahead of the release. The 1.9 percentage point raise might not seem much, but it was enough to trigger a risk-on rally on Wall Street, with Nasdaq futures rising 2.2% to a 5-day high and the S&P 500 rallying 1.8% during its best day in nine weeks. Dow futures rose 0.5% and chalked up a third bullish day in a row.

The USD was dragged lower by yields on dovish-Fed bets and the Japanese yen was the strongest performer.

Economic events in focus (AEDT)

Odds favour another robust employment report for Australia, given that has been the trend for well over a year. But expect markets to punce on any scraps of weakness in the data to try and justify a February RBA cut following last week’s soft trimmed-mean CPI print. Even if unemployment rises to 4% from 3.9%, it would only have returned to where it was the month prior.

• 10:50 – JP PPI
• 11:30 – AU employment report
• 18:00 – UK GDP m/m, index of services, industrial production, construction output, manufacturing production, trade balance
• 18:00 – DE CPI
• 23:30 – ECB Publishes Account of Monetary Policy Meeting
• 00:30 – US Jobless claims, retail sales
• 03:00 – FOMC member Williams speaks

USD/JPY technical analysis (daily chart):

It was the worst day for USD/JPY in over six weeks, with its bearish engulfing day slamming prices to its range lows and hinting at further downside. I don’t think this calls for a significant top given markets are still not confident with Fed cuts, but it could aid part of a healthy correction after bulls failed to take USD/JPY to fresh highs last week. A small shooting star marked a false breakout on Friday despite a strong NFP report, and momentum is clearly turning south.

A bearish divergence also formed on with the daily RSI (14) and we’ve now seen a daily close beneath the 20-day EMA, which put me on guard for an eventual break beneath 156, to bring the 50-day EMA (154.86) and monthly pivot point (154.63) into focus.

USD/JPY technical analysis (1-hour chart):

Wednesday’s low marked a false break of the December 24 low, and USD/JPY is now trying to find support around the weekly S1 pivot. Take note that the false break was accompanied by heavy selling volume which means shorts are trapped and more likely to close out (and fuel a bounce) if prices tick higher today.

But that could allow bears to reconsider reloading at higher levels in anticipation of a move down to the 50-day EMA / monthly pivot point.

The bias is to fade into moves up towards the 157 area.

Nikkei 225 futures technical analysis:

The Nikkei has been stuck in a sideways range since October, although a swing low may have formed above the monthly S1 around 38,000 with a small bullish engulfing day. A move to 39,000 or the monthly pivot point (39,230) appears to be on the cards.

Note the high-volume node (HVN) at 38,500 which shows the most traded price by volume in the consolidation. Such levels can act as support, so any pullback towards it could be favourable for bulls seeking a move up towards 39,200.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge