USD/JPY hits fresh 7-month high as central banks maintain hawkish mode

Market summary

• Short-term bond yields rose overnight as central banks warned that more hikes are coming
• Jerome Powell said hikes will come at a “careful pace” but one or two more may be on the horizon when speaking with the US senate
• Following the surge of UK core inflation to 7.1% y/y on Wednesday, the BOE hiked by 50bp to take rates to 5%
• Whilst no forward guidance was provided, another 25bp hike in August seems very likely with the potential for another two further out (at a minimum)
• The SNB opted for the 25bp consensus to take rates to 1.75%, and expectations are for anther 25bp hike in September
• With central banks maintaining a hawkish stance whilst still fighting inflation, it certainly keeps the pressure on the RBA to hike a further two or three more times
• It also means price action could be scrappy for forex markets as central banks continue their ‘race to the top’ of higher rates / higher currency
• EUR/USD’s break above 1.1000 was short lived, and pulled back to 1.0950 by the close (around the mid point of Wednesday’s range)
• USD/CAD extended its losses to a a fresh 9-month low, although bearish volatility is already subsiding
• AUD/USD held above Wednesday’s hammer low, so we see upside potential within yesterday’s range for today for a purely technical play
• Gold fell to a 3-month low and looks set to head for $1900, with $1919 and $1924 providing potential resistance levels for bears to consider fading into
• Oil prices felt the strain of recessionary fears with WTI falling back within its $67 - $73 range and closing below $70
• European shares bore the brunt of Powell’s speech and the BOE’s 50bp hike, sending the DAX beneath our 16k target before recovering most of the day’s losses by the close
• Despite fears elsewhere, US indices remain the optimists with the S&P 500 and Nasdaq 100 forming bullish engulfing days

Events in focus (AEDT):

• 09:30 – AU manufacturing and services PMI
• 09:50 – JP nationwide CPI
• 10:30 – JP manufacturing and services PMI
• 16:00 – UK retail sales

ASX 200 at a glance:

• Most bearish day for the ASX 200 in three weeks
• All 11 sectors were lower, led by IT and real estate
• Volumes were low relative to the bearish candle (lack of fresh sellers)
• Whilst it closed below 7200, a positive lead from Wall Street could soften the blow today
• SPI futures point towards a flat open
• Intraday support level includes 7100, 7147, 7145
• Resistance includes 7200, 2746

USD/JPY daily chart:

Back in November, a soft US inflation report saw markets lower bets for Fed hikes, and the USD/JPY plunged nearly 4% and left a ~300-pip liquidity gap (an area where little or no trading activity took place). These areas can act as a vacuum when prices re-enter them, and USD/JPY did just that on Thursday. Divergent policies and rising yield differentials remain supportive of USD/JPY, so unless the BOJ or MOF verbally intervene and talk of ‘currency volatility’, an initial move to 145 / 145.1 seems plausible. The bias remains bullish above 140.90, although the November high may provide support if prices pull back. And this could increase the potential reward to risk ratio for an anticipated move higher, within the liquidity gap.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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