The US dollar gained yesterday, following some hawkish remarks from New York Fed President William Dudley. The influential policymaker noted that even though inflation is lower than what the Fed would like, it is expected to pick up again, boosted by accelerating wages as the labor market continues to tighten. He added he is ‘very confident’ there is still a long way to go in this economic expansion. His comments echoed a similar message as Chair Yellen last week, that there’s no reason for the Fed to pause with its hiking plans.
USD/JPY edged north yesterday on Dudley’s hawkish remarks, after it hit support near the 110.80 (S2) zone to stop near the 111.70 (R1) obstacle, marked by the peak of the 2nd of June. Following the break above the downside resistance line taken from the peak of the 10th of May, the price structure suggests that the short-term outlook has turned positive. As such, even if we experience a setback due to profit taking on yesterday’s up-leg, we expect the bulls to remain in the driver’s seat. A clear break above 111.70 (R1) is possible to initially aim for our next resistance of 112.15 (R2).
Overall, what we consider most interesting is the growing divide within the Fed, between policymakers who are confident slowing inflation is transitory (Yellen, Dudley), and officials who have called for caution and a rebound in the data before acting again (Kashkari, Kaplan, Evans). The market seems to be on the side of caution as it continues to expect a pause before the next rate hike, which is fully priced in for June 2018. Considering that market pricing is already very pessimistic, we see the risks surrounding the dollar’s future path as asymmetric. We think that any upside reaction in case of accelerating inflation is likely to be larger than the corresponding negative one in case of further slowdown in prices.
Today, we will hear from Fed Vice Chairman Fischer, who tends to be on the same page with Yellen and Dudley in his views. Should he echo similar comments that slowing inflation is transitory, USD could gain a bit further.
RBA minutes: No fireworks
Overnight, the minutes of the RBA’s June policy meeting contained no surprises. Policymakers appeared slightly more upbeat on jobs, but they reiterated that developments in the labor and housing markets continue to warrant careful monitoring. Looking ahead, we think the Bank is likely to sound more optimistic when it meets again on the 4th of July, mainly because the latest jobs report that was released after the June gathering was stellar, which is likely to alleviate some of the RBA’s labor market concerns.
AUD/USD slid yesterday ahead of the minutes after it found resistance slightly below the 0.7635 (R1) barrier and fell below the upside support line drawn from the low of the 2nd of June. The bulls’ failure to aim for a higher high and the subsequent dip below the aforementioned upside line make us switch to flat for now with regards to the short-term picture. We prefer to wait for a decisive close above 0.7635 (R1) before we get confident on further advances again. On the downside, a break below the 0.7565 (S1) support will probably signal the completion of a double top formation and perhaps bring a short-term trend reversal.
Today’s highlights:
The economic calendar is very light today. From Europe, we get Sweden’s unemployment rate for May and Germany’s PPI data for the same month. In the US, the current account balance for Q1 is due out. From New Zealand, we get the GDT (Global Dairy Trade) index, but no forecast is available. That said, the event that will probably keep NZD traders on the edge of their seats in the following days is the RBNZ policy meeting on Thursday.
We have six speakers on the agenda. In the US, besides Fischer, Dallas Fed President Robert Kaplan, and Boston Fed President Eric Rosengren speak as well. Elsewhere, we will get remarks from SNB Chair Thomas Jordan, ECB Executive Board member Benoit Coeure and BoE Governor Mark Carney. In light of last week’s surprisingly hawkish BoE rate decision, we think Carney’s comments will be closely followed for any hints as to whether a policy action is indeed as likely as the hawkish dissents would lead one to believe.
USD/JPY
Support: 111.40 (S1), 110.80 (S2), 110.30 (S3)
Resistance: 111.70 (R1), 112.15 (R2), 112.50 (R3)
AUD/USD
Support: 0.7565 (S1), 0.7515 (S2), 0.7500 (S3)
Resistance: 0.7635 (R1), 0.7675 (R2), 0.7700 (R3)
