FX Week Forward – Prime 5 Occasions: July US Inflation Report & USD/JPY Fee Forecast

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July US Inflation Report Overview:

  • The July US inflation report (consumer price index) is due out on Tuesday, August 13 at 12:30 GMT, and the data are expected to show stability in price pressures.
  • With Fed policymakers reacting directly to movements in the US-China trade war, there is little reason to believe that the inflation data will have too much impact on prices.
  • Retail traders have remained net-long since May 3 when USDJPY traded near 111.98; price has moved 5.7% lower since then.

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08/13 TUESDAY | 12:30 GMT | USD Consumer Price Index (JUL)

The July US inflation report (consumer price index) due on Tuesday is due to show another small rebound in price pressures, but nothing that should motivate the Federal Reserve to alter its current aggressively dovish policy path in any significant manner.

According to Bloomberg News, headline CPI is expected in at 1.7% from 1.6%, and core CPI is due in at 2.1% unchanged (y/y). As global growth concerns have picked up in recent months, price pressures have dropped thank in part to a downswing in crude oil prices. However, stability in July may be catering to relatively stable inflation as well (though this should change come the August report).

Crude Oil Price versus US 5y5y Inflation Swap Forward (August 2018 to August 2019) (Chart 1)

FX Week Ahead - Top 5 Events: July US Inflation Report & USD/JPY Rate Forecast

Crude oil prices only fell by –0.5% during July, and in turn, medium-term US inflation expectations, as measured by the 5y5y inflation swap forwards, were stable at 2.105% at the end of July after starting the month out at 2.049% – a small bump of 5.6-bps.

Pairs to Watch: DXY Index, EURUSD, USDJPY, Gold

USDJPY Technical Analysis: Daily Timeframe (August 2018 to August 2019) (Chart 2)

FX Week Ahead - Top 5 Events: July US Inflation Report & USD/JPY Rate Forecast

With USDJPY trading in lockstep with US Treasury yields, the breakdown to fresh multi-year lows in sovereign bond yields supports a stronger Japanese Yen. In our most recent technical update on USDJPY, it was noted that the pair “has fallen back below the descending trendline from the April and July highs, established an outside engulfing bar on August 1, dropped below the ascending trendline from the January and June lows, dropped below the 76.4% retracement of the 2018 high/low range at 106.97, and is on track to break the June low at 106.78…it is very obvious that a lot of technical damage has been done in a short period of time.”

For now, the path of least resistance remains to the downside. USDJPY price remains below the daily 8-, 13-, and 21-EMA envelope, with both daily MACD and Slow Stochastics have trending lower in bearish territory; the latter remains oversold, a strong sign of a bearish trending market. To this end, after USDJPY failed to retake the June low and 76.4% retracement of the 2018 to 2019 high/low range near 106.78/97, it appears that USDJPY is due for a retest of the yearly low at 104.63.

IG Client Sentiment Index: USDJPY Rate Forecast (August 9, 2019) (Chart 2)

FX Week Ahead - Top 5 Events: July US Inflation Report & USD/JPY Rate Forecast

USDJPY: Retail trader data shows 73.1% of traders are net-long with the ratio of traders long to short at 2.71 to 1. In fact, traders have remained net-long since May 3 when USDJPY traded near 111.98; price has moved 5.7% lower since then. The number of traders net-long is 2.2% lower than yesterday and 5.1% higher from last week, while the number of traders net-short is 8.5% lower than yesterday and 15.5% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDJPY-bearish contrarian trading bias.

Note: This was originally published on Friday, August 9, 2019.

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— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at [email protected]

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX





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