The US dollar strengthened a little yesterday, in the aftermath of the US inflation data for October. The headline CPI rate dropped as expected, but the core rate surprisingly rose, beating the forecast for remaining unchanged. This is a very encouraging development for FOMC policymakers we think, considering that the core rate had remained unchanged for five straight months prior to yesterday’s uptick. With core inflation showing signs of life once again, market participants could gradually start to price in a greater amount of tightening in 2018, especially if the labour market and the broader economy remain on a healthy track.
Having said that, with a December rate hike being almost fully priced in by now, we think that the key driver for the dollar over the next weeks will be the likelihood for tax reform, as opposed to monetary policy. In this respect, the House will vote today on the final version of its own tax bill. If it passes, then we would be one step closer to finalising tax reform, and the dollar could gain. Afterwards, the US Senate has to vote on its own version of the tax bill, and if this passes as well, then the two chambers would need to reconcile their two plans and reach common ground.
USD/JPY traded lower on Wednesday, falling below the support (now turned into resistance) barrier of 113.10 (R1), to trigger some buy orders near the 112.45 (S1) line before rebounding somewhat after the US CPI data. At the time of writing, the pair is testing the 113.10 (R1) line as a resistance, where a break may open the way for the 113.80 (R2) hurdle. Having said that, as long as the rate continues to trade below the 114.30 (R3) important obstacle, we would treat the latest rebound or any short-term extensions of it, as a corrective phase. The 114.30 (R3) zone has been acting as the upper bound of the wide sideways range that has been containing the price action since the 15th of March and thus, we prefer to wait for a clear close above that zone before we start evaluating the case on whether the outlook has turned positive. On the downside, if the bears take charge again soon, they could aim for another test near 112.45 (S1). A break below that level is possible to open the way for our next support of 111.70 (S2).
USD/JPY
Support: 112.45 (S1), 111.70 (S2), 111.00 (S3)
Resistance: 113.10 (R1), 113.80 (R2), 114.30 (R3)
AUD little changed after employment prints
The Aussie spiked higher overnight, but quickly gave back most of its gains to trade more or less unchanged, following the release of Australia’s jobs data for October. The unemployment rate dropped, but that was probably owed to a similar decline in the labour force participation rate. The net change in employment stayed in positive territory, but it was lower than expected. We should also note that the wage price index for Q3, released yesterday, accelerated by less than what was anticipated. Overall, these developments support the case for the RBA to keep its policy unchanged for a prolonged period of time, and for the Bank to maintain a relatively neutral tone overall.
AUD/USD traded lower yesterday to hit support at 0.7570 (S1), near the medium-term upside support line taken from the low of the 2nd of January. The pair continues to trade within the downside channel that’s been containing the price action since mid-September, but given our proximity to the aforementioned upside support line, we prefer to take the sidelines for now as there is a decent likelihood for a rebound from there. We prefer to wait for a clear close below that upside support line and the 0.7570 (S1) barrier before we get confident on larger bearish extensions. Something like that may initially aim for our next support of 0.7535 (S2), marked by the low of the 22nd of June.
AUD/USD
Support: 0.7570 (S1), 0.7535 (S2), 0.7500 (S3)
Resistance: 0.7635 (R1), 0.7690 (R2), 0.7730 (R3)
As for the rest of today’s highlights
During the European morning, in the UK retail sales for October will attract attention. The forecast is for both the headline and the core rates to have rebounded, after having fallen sharply the previous month. The headline rate is expected to have entered the positive territory, albeit marginally, while the core is anticipated to reach the 0.0% mark. Even though a rebound in retail sales could support the pound a little on the news, the focus for GBP traders is likely to remain on Brexit developments. In the US, industrial production for October and the NAHB housing market index for November are due out.
We have five speakers on the agenda. In the UK BoE Governor Mark Carney will deliver remarks while in the eurozone, we will hear from ECB Vice President Vitor Constancio and Executive Board member Yves Mersch. Over in the US, Dallas Fed President Robert Kaplan and Cleveland Fed President Loretta Mester will speak.
Sources: Econ Alerts and FXGiants