After yesterday’s drop on Wall Street, sentiment improved overnight on the back of positive comments from Chinese president Xi Jinping. He struck a conciliatory tone, pledging to open China's economy and 'significantly' lower tariffs on vehicle imports, without giving much details.
As stock indices bounced back, safe haven yen weakened, although gold remained largely unchanged. The dollar, meanwhile, remained out of favour after falling for two consecutive trading sessions on Monday. This kept the gains on the USD/JPY in check. The greenback struggles to sustain a bid after that disappointing jobs report on Friday helped to lower expectations for aggressive rate hikes from the Fed. The dollar is also held back amid political turmoil within the US and ongoing trade war concerns. Indeed, market participants do not appear to be too optimistic about the prospects of an imminent dollar recovery: every attempted rally has so far turned out to be a dead-cat bounce.
The greenback could get in real trouble if this week’s incoming inflation data points to weaker price levels in the US. The producer price index (PPI) will be released later on today while the more important consumer price index (CPI) measure of inflation will be published tomorrow. Headline PPI is expected to have risen 0.1% month-over-month in March, while headline CPI is expected to have remained flat. The core measures of PPI and CPI are both expected to have risen by 0.2% m/m each.
The yen meanwhile remains edgy after trade tensions between China and the US intensified last week as US President Donald Trump threatened to impose tariffs on $100bn of Chinse imports. While Mr Xi’s speech overnight has helped to soothe investor sentiment slightly, the trade dispute could easily escalate again.
Sentiment could also turn sour on other geopolitical risks stemming from Russia and the Middle East. Russian President Vladimir Putin has been criticised for his support of the Syrian government, which was accused of launching a chemical weapons attack in the war torn nation. Mr Trump has said that the US government will decide whether or not to strike Syria 'very quickly' in response to the alleged chemical weapons attack.
Russia, meanwhile, has already been blamed by the West as being behind the poisoning of an ex-spy and his daughter in the UK. About 28 nations have already sent home more than 140 Russian diplomats in a coordinated response, while the US has introduced various sanctions against Russian oligarchs and political officials in an attempt to hurt the Russian economy.
USD/JPY hits key resistance
After rising for two straight weeks, the USD/JPY has reached a key resistance zone in the 107.30-108.05 range. The lower end of this range marks the 2017 low while the upper end was the last support prior to the latest breakdown. Thus, for as long as the USD/JPY remains below this 107.30-108.05 range, the technical outlook remains bearish, despite its recent bounce. In fact, given that the long-term trend has been bearish, there is a good chance that the downward trend could resume from here, barring an unexpectedly sharp rise in US CPI on Wednesday.
If the sellers do step in here again then price may fall back towards the 105.00 psychologically-important handle, below which there is little further support seen until the next psychological handle of 100.00. But let’s not get too ahead of ourselves. First thing is first: the bears must defend that 107.30-108.05 resistance area as failure to do so could lead to a sharp short-squeeze rally towards 110.00 and possibly 111.00, where the long-term downward trend comes into play.
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