USD weakens as monetary policy outlook alters

The USD continued to weaken against its counterparts yesterday in the aftermath of the release of June’s US employment report, yet the main focus was on statements of Fed policymakers which tended to signal that two more rate hikes may be needed, yet the bank may be nearing the end of its rate hiking cycle. The next big test for the USD is expected to be the release of June’s CPI rates and should inflation remain persistently high we may see the USD getting some support, as market expectations for the Fed’s intentions may alter once again. USD’s weakening was sensed more than other FX pairs against the JPY, given that JPY is particularly sensitive to monetary outlook differentials as BoJ’s rates are well anchored at -0.10%.

It’s characteristic that on a technical level, USD/JPY dropped heavily yesterday breaking the 142.30 (R1) support line now turned to resistance and continued lower testing the 140.80 (S1) support line. We maintain a bearish outlook for the pair as we are now able to draw a downward trendline guiding the pair and showing us the limitations of the downward movement. The RSI indicator has dropped below the reading of 30, which on the hand showcases the dominance of the bears on the other, implying that the pair may have reached oversold levels and may be ripe for a correction higher. Should the bears maintain control over the pair we may see it breaking the 140.80 (S1) support line and aim for the 138.80 (S2) support barrier. Should the bulls take over, we may see the pair reversing course and breaking the prementioned downward trendline in a first signal that the downward movement has been interrupted and also break the 142.30 (R1) resistance line in search of greener pastures.

In the European theatre, we make a start with UK’s employment data for May. The data were worse than expected with the unemployment rate rising to 4.0% and the employment change figure dropping below expectations and reaching 102k. An interesting element was the average earnings growth rate which accelerated, implying that the UK employment market, despite some cracks appearing in its tightness, may continue feeding inflationary pressures in the UK economy. Such readings may sharpen BoE’s hawkishness on a monetary policy level. On the other hand, BoE Governor Bailey yesterday stated that he expects inflation to come down markedly, implying that the bank’s monetary policy tightening is expected to bring results, yet that remains to be seen.

Also at this point, we would like to make a comment about New Zealand’s RBNZ interest rate decision due out during tomorrow’s Asian session. After thirteen consecutive hikes and raising the cash rate by a total of 525 basis points the market seems to expect the bank to remain on hold Thursday and we tend to concur. Yet we may see the bank in its accompanying statement remaining on guard to fight inflationary pressures in New Zealand’s economy, given that the CPI rate is still at very high levels.

NZD/USD remained rather stable, just above and around the 0.6205 (S1) level. We tend to maintain our bias for the sideways motion to continue yet also note that RBNZ’s interest rate decision may alter the pair’s direction either way. Should the pair find extensive buying orders along its path we may see NZD/USD aiming for the 0.6350 (R1) resistance base, while should the bears take over, we may see the pair breaking the 0.6205 (S1) support line and aim if not breach the 0.6060 (S2) support level.

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In today’s European session, we note the release of Germany’s final HICP rate for June, while in the American session, NY Fed President Williams is scheduled to make statements and oil traders may be more interested in the release of the API weekly crude oil inventories figure. During tomorrow’s Asian session, we also note the release of Japan’s corporate goods prices for June, while on the monetary front, we note that RBA Governor Philip Lowe is to make statements.