Dollar remains vulnerable ahead of FOMC NFP

The dollar has started the new week on the front-foot after dropping over 1.5% last week. The greenback has fallen for five consecutive weeks, so the rise at the start of this week may very well be an oversold bounce rather than a trend reversal. After all, there has been no fundamental change to instigate a reversal in the dollar. That could change however in midweek in the event the FOMC turns out to be more hawkish than expected or at the end of the week should US jobs data come in significantly stronger than anticipated. But for now, we remain sceptical on the dollar even if it looks severely oversold.

As far as today’s session is concerned, there was nothing significant in terms of European data this morning but from the US we had the latest personal spending and income data as well as the PCE Price Index, which is a key gauge of inflation. Personal spending rose 0.4% month-over-month in December, a touch weaker than expected, although the weakness was offset by an upward revision to November’s figure. Personal income also rose 0.4% m/m, only this was a touch stronger than anticipated. Meanwhile core PCE Price Index was bang in line with the expectations with a month-over-month print of +0.2%. The dollar edged further higher on this, but not in a meaningful way.

USD/JPY next domino to fall?

Despite today’s bounce in the dollar, the greenback still looks vulnerable especially against the yen, which was stronger across the board today. The USD/JPY pair has not yet tested liquidity below last year's low (which comes in around the 107.30/35 area), unlike the other majors which have already broken their respective 2017 lows/highs. Although this could be viewed as potentially bullish for when the dollar bottoms out (given the buck’s relatively better performance here), it could also be viewed as one pair that is about to play catch up with the rest of the majors. If that’s the case then the USD/JPY could be next big domino to fall.

Technically the trend is indeed bearish for the USD/JPY. Last week’s break of bullish trend was a further bearish development. With the 2017 low of 107.33 in sight now, price may drop to probe liquidity below this level before making its next move. Below this level are two old broken resistance levels which may offer some support, with the first coming in at 106.90/5 and the second coming in at 105.50. But to have any chance of getting to these levels, the USD/JPY must first break below intermediate support at 108.30/45 area, which has held for the past two-and-a-half trading days. Meanwhile resistance comes in at 109.00, followed by the backside of that broken trend line and old support at 110.20.