Yen strength and dollar weakness are once again the order of the day as the Fed’s aggressive option fails to prop up risk appetite. This is partly due to the threat of a downgrade of the United States’ largest bond insurer MBIA. The S&P 500’s failure to close above the key 1,370 resistance, after having hit an intraday high of 1,385 and the Fed’s 50 basis points, is a double whammy for USD/JPY, with the dollar sustaining further yield damage and the yen flexing its risk appetite muscle. Today’s personal consumption figures will likely drag the pair below 106 along with the rest of the yen crosses. Fresh data weakness (see below) will likely lift the euro above $1.49 to as high as $1.4950, sustaining fresh dollar damage, thus possibly boosting gold towards $950.
The 8:30 am release of the December U.S. personal consumption is expected to increase 0.1%, sharply less than the 1.1% in November, thus materializing fears that U.S. consumers are finally scaling back their contribution to a soft landing.
We’re not placing much emphasis on the PCE price index (Fed’s favorite inflation target) as the central bank’s priority increasingly shifts towards sustaining growth. Core PCE is seen unchanged at 2.2% year over year. Personal income growth is expected to remain unchanged at 0.4%.
On the positive side, weekly jobless claims may provide some optimism if they remain under 325,000, which was up from the previous release of 301,000, thus raising expectations for tomorrow’s labor report.
The 9:45 am release of the Chicago PMI is expected at 52 in January from 56.4 in December, with the risks of a sub-50 figure looming large. The December manufacturing ISM has already fallen below 50. Another sub-50 figure in tomorrow’s release of the Jan report will be consistent with recession levels.
USD/JPY eyes 105.50
We noted above that stocks’ failure to respond to the Fed’s generous 50 bp cut confirms shaky sentiment in the main indices, thereby dictating prolonged gains in the Japanese currency. A personal consumption index figure below 0.4% should continue to bolster the yen and drag USD/JPY towards the interim support of 105.70, en route to 105.50. We should also see further losses in all yen crosses, including EUR/JPY (156.50), GBP/JPY (209) and AUD/JPY (93.50). A figure above 0.5% and jobless claims below 310,000 should weigh on the yen and call up 106.60.
Euro inflated by CPI
A 3.2% estimate in Euro zone January inflation bolsters the case of the ECB’s hawks and sustains EUR/USD above the $1.48 especially as the EUR-USD interest rate differential moves up to 40-year high of 1.00%. We expect the euro to sustain strength into the U.S. session except against the Japanese currency. Traders eye the $1.49 figure as a loose obstacle, before possibly calling $1.4945. A disappointing payrolls report and/or another 5.0% reading in the unemployment rate can call up the $1.50 before week’s end. Support stands firm at 1.4830, backed by 1.48.
House prices pare sterling’s post-Fed gains
Sterling’s weak fundamentals haunt it anew after a temporary reprieve that took place on the back of deteriorating USD dynamics. The third consecutive monthly decline in the nationwide house price measure fuels expectations of a Bank of England rate cut next month to 5.25%. Cable may obtain a brief fillip from weak U.S. data, cementing support at 1.9820, but risks remain to the downside in the event of protracted selling in equities. Support stands at 1.9760. Upside capped at 1.9920.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
