USD/JPY Forecast: Sideways to negative movement likely ahead of Yellen speech

The Dollar-Yen pair failed at 5-DMA on Tuesday and dropped to a low of 112.60 levels. The American dollar suffered its worst drop since July after the US President-Elect Donald Trump expressed concerned regarding the strength in the US dollar.

Trump inflation trade is fading

In an interview with the Wall Street Journal, Trump stated that US companies can’t compete with Chinese companies because the US currency is too strong. Anthony Scaramucci, a senior member of Trump’s economic advisory council, while speaking at the Davos Economic Forum, also expressed concerns regarding rising currency.

Trump also called the border adjustment plan which would tax imports and exempt exports, as "too complicated."

Usually US Presidents talk up the US dollar as it helps boost confidence; hence Trump’s stance is unprecedented. However, it should not come as a surprise… moreover, he would want to have a weaker dollar if he intends to revive manufacturing and re-establish US as an export power house.

The unwinding of the Trump trade has gathered pace, which is also evident from the sell-off in the US banking stocks on Tuesday. The financials were the major gainers of the Trump trade.

Focus on US inflation & Yellen speech

The cost of living as measured by the consumer price index (CPI) is expected to improve to 2.1% annually from the last reading of 1.7%. The core figure is expected to tick up to 2.2% from the prior 2.1%.

Energy prices are likely to have pushed the inflation higher. The actual print may miss the estimate as the impact of the rise in oil prices could have been partly negated by a strong US dollar.

Nevertheless, an uptick in the core CPI could help stall the sell-off in the US dollar.

Fed chair Yellen will deliver a speech at 15:00 EST. The first of the two speeches (due this week) is scheduled during the market hours. FX markets could move if Yellen sheds light on the monetary policy outlook.

Technicals – Increased risk of a drop to 112.00

4-hour chart

• The bearish break from the falling channel seen on the 4-hour chart following a failure at the 5-DMA yesterday suggests the spot could extend losses to 112.00 levels.
• The daily RSI is yet to hit the oversold territory, which indicates potential for a further sell-off in the pair.
• He first sign of bearish exhaustion would be the bearish crossover between 50-MA and 200-MA on 4-hour chart. The crossover often called as a ‘death cross’ is almost always a lagging indicator/contrary indicator.
• On the higher side, only a break above 113.75 would signal short-term bearish invalidation.

GBP/JPY Forecast – lower highs, lower lows formation is intact

4-hour chart

• Despite the sharp rally from the low of 137.16 on Tuesday, the outlook still remains bearish as the descending trend line is intact.
• A repeated failure at 140.15 (38.2% fib retracement of Trump trade) followed by a drop below 138.92 would signal the corrective move has ended and the cross could make its way back to 137.16 – 136.45 levels.
• On the higher side, only a close above the head and shoulder neckline (former support, now resistance) level of 141.60 would signal bearish invalidation.

NZD/USD Forecast: Eyes 0.8260 levels

Daily chart

• Kiwi bulls are set to reassert their dominance and challenge supply around 0.7260 (resistance offered by the rising trend line drawn from Jan 2016 low and May 2016 low).
• This is evident from Tuesday’s sharp rally. Fresh bids are anticipated on dips, while bearish invalidation is seen only below 0.7148 (Monday’s high).