Market Analysis

USD/JPY: Rising amid concerns over a partial US government shutdown and tension between Trump and the Fed

The US dollar rose against most of its peers on Wednesday, amid a mixture of negative elements including sensitive concerns over a partial US government shutdown and tension between the White House and the Federal Reserve (Fed). However, President Donald Trump expressed confidence in Treasury Secretary Mnuchin amid worries over a weakening economy and a stock market decline, but reiterated his disapproval of the US Federal Reserve (Fed), declaring it has raised interest rates too quickly.

The US durable goods orders rose to 0.8% in November, comparing to the downwardly revised -4.3% drop in October and weaker than analysts’ estimates of a 1.6% growth. Transportation equipment boosted the increase. Durable products often involve large investments they are sensitive to the US economic situation. Generally, a high reading is positive for the USD whereas a low reading is negative for the USD.

The Bank of Japan (BoJ) kept the interest rate unchanged at -0.1% at its December meeting, even after the US Federal Reserve (Fed) raised rates for the fourth time this year. Policymakers also kept the target for the 10-year government bond yield at around 0% and maintained their upbeat view on the domestic economy despite slowing growth in China, uncertainty from Sino-US trade dispute and volatile financial markets.  Generally, if the BoJ is hawkish about the inflationary outlook of the economy and raises the interest rates it is positive, for the JPY. On the other hand, if the BoJ has a dovish view on the Japanese economy and keeps the ongoing interest rate, or cuts the interest rate it is negative for the JPY.

Since the beginning of the year 2018 until last Wednesday close, the USDJPY is underwater with a loss of more than 1.0% and since the start of December dived in excess of 2.0%. Nonetheless, since the beginning of the week, the currency pair remains above water with a minor gain of 0.25% but on the daily time-frame, closed well in the green with a gain of 1.0%. Furthermore, the USDJPY remains in a warning phase since mid-December.

On last Wednesday session, the currency pair rallied with a wide range and closed near the high of the day, in addition, managed to close above Monday high, which suggests a strong bullish momentum.

The stochastic is showing an oversold market but is beginning to display a shy bullish momentum.

After almost three months of sideways action, the USDJPY decided to break down and almost tested 109.77 August low but found enough buying pressure to reverse and develop a bullish engulfing pattern. The current bullish engulfing pattern is a trend reversal pattern, the first day is characterized by a small body, followed by a day whose body completely engulfs the previous day’s body and closes in the opposite direction of the trend. This bullish engulfing pattern is more likely to signal reversal when four or more bearish candlesticks precede it. The more preceding bearish candlesticks the bullish engulfing candle engulfs, the greater the chance a trend reversal is forming, confirmed by a second bullish candlestick closing higher than the bullish engulfing candle.

Liquidity was thin after major markets were closed on Tuesday for the Christmas holiday. Markets in UK, Germany and France remained closed on Wednesday. Therefore, the USDJPY pair will likely remain directionless until investors see how Wall Street will fare after the Christmas break.


USD/JPY Daily Candlestick Chart

USD/JPY Daily Candlestick Chart


Market Events to Watch:

Thursday, December 27, 04:00 GMT (Wednesday, December 26 at 23:00 ET):  The Bank of Japan (BoJ) Governor Kuroda is scheduled to hold a press conference about monetary policies in Tokyo. As head of the BOJ, which sets short-term interest rates, he has a major influence on the value of the JPY and consequently affects the Japanese economy. Traders watch his speeches closely as they usually drop indirect hints regarding future monetary policy and interest rate changes.

Thursday, December 27, 23:30 GMT (18:30 ET): Japan Statistics Bureau is scheduled to release the Tokyo core consumer price index (CPI) year-on-year in December, which is expected to drop to 0.9%, comparing to the 1.0% registered in the previous period. This indicator measures the change in the price of goods and services purchased by consumers in Tokyo, excluding fresh food.

Thursday, December 27, 23:50 GMT (18:50 ET): Japan Ministry of Economy, Trade, and Industry is scheduled to release the retail trade year-on-year in November, which is expected to drop to 2.2%, comparing to the 3.5% registered in the previous period. Consumer spending which accounts for the majority of overall economic activity is a key important indicator for the Japanese economy. A high reading is positive for the JPY, while a low reading is negative.

Friday, December 28, 13:30 GMT (08:30 PM ET): The US ISM-Chicago Inc. is scheduled to release the Chicago Purchasing Managers Index in December, which is expected to drop to 63.0 comparing to 66.4 registered in November. This index is an indicator of business trends and it is related to the ISM Manufacturing Index. It is widely used to indicate the overall economic condition in the US. A result above 50 is bullish for the USD, whereas a result below 50 is seen as bearish.


Written by Hugo O’Neill, External Analyst


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