USD/JPY hints at double top ahead of US inflation: Asian Open

Market Summary:

• The RBA are likely to hold their cash rate at the 12-year high of 4.35% in February, and calls for peak rate have resurfaced following November’s soft inflation figures. Weighed CPI y/y is now below the cash rate at 4.3%, trimmed mean slowed to a 17-month low of 4.6% and CPI less volatile items and travel fell to 4.8%.
• RBA cash rate futures now imply a 97% chance that the RBA will hold rates at their February 6^th meeting, no more hikes are to follow and the first full 25bp cut is priced in for August.
• Yet this was not enough to help the ASX 200 rally, which was bogged down by the mining sector and a heavy day of losses for lithium stocks
• The S&P 500 and Dow Jones are on track for bullish engulfing weeks while the Nasdaq 100 is trying to form a 2-week bullish reversal pattern (bullish piercing line), although the US inflation report is a key risk event which could mix things up over the next 24 hours
• The Japanese yen was the weakest FX major and lower against all of its peers on Wednesday. CHF/JPY broke to a record high, AUD/JPY formed a bullish engulfing candle and both GBP/JPY and EUR/JPY rose to 6-week highs
• Strong tech stocks helped the Nikkei reach a 33-yeare high on Wednesday and close just shy of 35k
• Gold prices have continued to drift lower since the December 28 peak, although a series of lower wicks on the 1-hour chart suggest support could reside around $2020 over the near term

Events in focus (AEDT):

• 11:30 – Australian trade balance
• 16:00 – Japan’s leading and coincident indices
• 00:30 – US CPI

US inflation is the key metric on trader’s radars over the next 24 hours, and that leaves the risk of no appetite for risk and low levels of volatility in today’s Asian session. Core CPI is expected to have risen 0.3% m/m in December (as it did in November) which is above its long-term average of 0.28%. And whilst core CPI y/y is expected to slow to 3.8% y/y – its lowest level since September 2021 – headline CPI is expected to increase to 0.2% m/m (from 0.1% prior) and 3.2% y/y (from 3.1% prior).

With Fed fund futures effectively pricing in for the Fed to hold rate at their late-January meeting, today’s report is really about justifying the several rate cuts priced in this year. And that likely means we need to see inflation data come in softer across the board to avoid a stronger US dollar.

ASX 200 at a glance:

• The ASX 200 reversed most of Tuesday’s gains and formed a bearish inside day
• Its daily low probed yet respected the 20-day average for a third day to show the market is paying attention to the technical level, yet it remains unclear whether the average will act as a springboard or a key level of support waiting to be broken
• The US inflation report is likely to be a key driver tomorrow should it surprise Wall Street enough (a strong set could be bearish for global indices, whereas a soft CPI report could be bullish)
• I suspect it could be a low volatility day today without a domestic catalyst, so traders may prefer to stick to intraday positions with smaller profit objectives

USD/JPY technical analysis (chart):

It has been a decent start to the year for USD/JPY, which printed a prominent bullish engulfing candle on the first week of January and is on the cusp of testing last week’s high for a second bullish week. Yet how it performs from here is likely in the hands of the US inflation report at 00:30 AEDT (13:30 GMT).

Failure to break above 146 risks leaving a double top on the pair with a bearish divergence on RSI (14) while RSI (2) remains in highly overbought levels. Given the consensus for a slightly hotter set of CPI figures, the contrarian in me wonders whether even a slightly softer set of numbers could knock USD/JPY from its perch.

A low volatility session in Asia seems likely, but from here bears may want to fade into moves towards 146 / monthly S1 pivot for a cheeky countertrend short. But given the trend structure on the weekly chart ad prominent bullish engulfing week, I see the potential for a higher USD/JPY in the coming weeks.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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