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Daily Pivots: (S1) 0.8552; (P) 0.8570; (R1) 0.8591; More....

EUR/GBP is still bounded in sideway consolidation despite brief dip to 0.8548. Intraday bias remains neutral at this point. IN case of another recovery, upside should be limited below 0.8648 support turned resistance to bring another decline. Below 0.8548 will target 0.8491 low first. Firm break there will resume larger down trend.

In the bigger picture, current development suggests that down trend from 0.9267 (2022 high) is still in progress. This decline is seen as the third leg of the pattern from 0.9499 (2020 high). Break of 0.8201 will target 100% projection of 0.9499 to 0.8201 from 0.9267 at 0.7969. In any case, outlook will stay bearish as long as 0.8764 resistance holds.

• The 2-day rebound seen in USD/JPY has reached 146.20/70 minor resistance zone.
• The movement of USD/JPY in the past month has a significant direct correlation with the US 10-year Treasury/10-year JGB yield spread.
• The short-term to medium-term trends of the US 10-year Treasury/10-year JGB yield spread remain bearish.
• Watch the 146.70 key short-term resistance on USD/JPY.

USD/JPY has rebounded and hit the short-term resistance zones of 144.80/145.30 and 146.20/70 as highlighted in our previous analysis reinforced by the better-than-expected US non-farm payrolls data for November and a media report released yesterday, 11 December that stated the Bank of Japan (BoJ) officials were in no rush to scrap short-term negative interest in the upcoming 18 to 19 December monetary policy meeting according to sources.

This latest set of “BoJ’s monetary policy thought process” reported by the media contrasted with the hawkish remarks made by BoJ Governor Ueda and Deputy Governor Himino last week that increased market speculations that the decade-plus of short-term negative interest rate policy in Japan may be scrapped sooner than expected.

The USD/JPY extended its gains from last Friday and rallied by +0.86% to print an intraday high of 146.59 as seen in yesterday’s 11 December US session on the backdrop of the media report.

It’s all about the yield spread between the US 10-year Treasury & 10-year JGB

Fig 1: Movement of USD/JPY and US 10-year Treasury/10-year JGB yield spread as of 12 Dec 2023 (Source: TradingView, click to enlarge chart)

Interestingly, the movement of the USD/JPY in the past month has moved in sync with the yield spread of the US 10-year Treasury/10-year Japanese government bonds (JGB) which can be considered as an indirect summation net effect of monetary policy guidance from the Fed and BoJ.

Their current 20-day rolling correlation coefficient is at 0.90 which suggests that the movement of the US 10-year Treasury/10-year JGB yield spread has a significant direct influence on the movement of the USD/JPY.

If the US 10-year Treasury/10-year JGB yield spread compressed (inched downwards), the movement of the USD/JPY reflected a similar directional move on the downside and vice versus if the yield spread expanded to the upside.

Overall, the short to medium-term trend phases of the US 10-year Treasury/10-year JGB yield spread is still bearish as it continues to trend below its downward sloping 13-day moving average. Hence, it may put further downside pressure on the USD/JPY.

USD/JPY’s recent minor rally may have exhausted

Fig 2: USD/JPY short-term minor trend as of 12 Dec 2023 (Source: TradingView, click to enlarge chart)

The price actions of the USD/JPY have staged a bearish reaction after 2-day of counter-trend rebound at the 146.70 short-term pivotal resistance (former minor swing lows area of 4/5 December 2023 & 50% Fibonacci retracement of the prior minor downtrend phase from 13 November 2023 high to 7 December 2023 low).

In addition, the hourly RSI momentum indicator has flashed out a bearish divergence condition at its overbought condition during yesterday’s US session which suggests that the bullish momentum of the 2-day rally is likely to be exhausted.

Near-term support will be at 144.20 and a break below it exposes the next intermediate support zone of 142.20/141.60 (coincides with the 200-day moving average).

On the flip side, a clearance above 146.70 sees a potential extension of the counter-trend rebound towards the medium-term resistance zone of 147.40/148.60 (coincides with the downward sloping 20 and 50-day moving averages).

The Stoxx 600 and the S&P500 traded at a fresh ytd high on Monday as the British FTSE 100 lagged behind its Western peers, as mining stocks drove the index lower. But overall, the week started on an optimistic note ahead of today’s US inflation update, tomorrow’s FOMC decision and Thursday’s European Central Bank (ECB) and Bank of England (BoE) decisions. The US 2-year yield advanced to 4.77% and the 10-year yield tested the 4.30% resistance, but both are down this morning, as bond investors lie in ambush before the US inflation update that will hit the headlines in a couple of hours from now.

All eyes on US CPI

Headline CPI in the US is expected to have steadied on a monthly basis thanks to subdued energy prices and the yearly figure may have eased from 3.2% to 3.1% in November. Core inflation is seen steady at 4%. These numbers certainly look much better than what they did back in 2022, when we saw the US core inflation reach 6.6%. But at 4%, core inflation in the US is still twice the Federal Reserve’s (Fed) 2% policy target. And as the Fed Chair Powell will certainly say tomorrow, there is an encouraging progress in the Fed’s fight against inflation, but the job is not done just yet.

But because the whole monetary policy tightening is here to fight inflation, a softer-than-expected set of inflation figures could further boost the Fed doves and appetite in US bonds, but gains will likely remain limited before tomorrow’s Fed decision and economic forecasts. Although the Fed is happy with the current results – weakening inflation despite a healthy loosening in the job market and quite a resilient growth – Powell won’t cry victory on inflation and pop the champagne this week. If he did, the sovereign bond party would get out of control. The latter would send yields collapsing and loosen the financial conditions before time and interfere with the Fed’s plans to bring inflation down to 2%. Therefore, the chances are that the Fed will sound happy but cautious, no matter what we see in inflation print today.

Activity in Fed funds futures assesses 80% chance for a May rate cut and nearly 50% chance for a March rate cut. This week’s inflation data and Fed comments will shift these expectations toward one way or the other, but Powell will sure find it harder to control market optimism if headline inflation eased below the 3% psychological target, into the 2% waters… as yes, at 2 and something percent, we get really closer to the 2% target.

Calm down, says BoJ

The US dollar sees resistance near the top of its November-to-now downtrending channel, the EURUSD waits around its 100-DMA to find a fresh direction, as the USDJPY trades around the 145 level, having priced out a good number of expectations of an imminent rate hike next week, as the Bank of Japan (BoJ) officials already killed the idea that a rate hike will happen this month. But the BoJ will hike sooner rather than later, and that makes a short USDJPY a good trade, for those who are patient enough. From now on, any price recoveries in the USDJPY will be interesting opportunities to strengthen short USDJPY positions for top sellers. Note that a stronger yen and a tighter monetary policy is not positive for stock valuations, therefore we could see the Japanese Nikkei 225 index drift lower as the hawkish BoJ expectations strengthen into next year.

In the energy space, US crude is gently recovering toward the $72pb level on threats that OPEC would extend and deepen cuts in case the selloff continued, but on the other hand, the industry news doesn’t help bring the bulls in. Freshly announced, Occidental agreed to buy CrownRock for about $10bn to extend its presence in the Permian Bassin. Consolidation in the Permian Bassin means synergy, scale economies and eventually lower production costs. The deal – which is set to close early 2024 – will help drive shale prices to levels not seen since the pandemic crushed oil markets, according to Bloomberg news. Just saying.

Daily Pivots: (S1) 1.6348; (P) 1.6389; (R1) 1.6431; More...

EUR/AUD is still bounded in consolidation from 1.6267 and intraday bias remains neutral. Outlook will stay bearish as long as 1.6515 resistance holds. On the downside, break of 1.6267 will resume the whole decline from 1.7062 to 100% projection of 1.7062 to 1.6319 from 1.6844 at 1.6106 next. However, break of 1.6515 resistance will turn bias back to the upside for stronger rebound.

In the bigger picture, fall from 1.7062 medium term top is seen as correcting the whole up trend from 1.4281 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.4281 to 1.7062 at 1.6000. Strong support could be seen there to bring rebound on first attempt. But risk will stay on the downside as long as 1.6844 resistance holds. Sustained break of 1.6000 would bring further fall to 61.8% retracement at 1.5343.

Daily Pivots: (S1) 0.9439; (P) 0.9463; (R1) 0.9480; More...

Intraday bias in EUR/CHF stays neutral at this point, as consolidation from 0.9402 might extend further. Overall outlook stays bearish as long as 0.9543 resistance holds. On the downside, decisive break of 0.9407 will confirm larger down trend resumption.

In the bigger picture, medium term outlook remains bearish as long as 0.9683 resistance holds. Firm break of 0.9407 (2022 low) will resume long term down trend. Next target will be 61.8% projection of 1.1149 (2020 high) to 0.9407 from 1.0095 at 0.9018.

Daily Pivots: (S1) 145.12; (P) 145.85; (R1) 146.89; More...

Intraday bias in USD/JPY is turned neutral first with current retreat. Break of 144.80 minor support will suggest that rebound from 141.59 has completed at 146.58, after rejection by 55 4H EMA. Intraday bias will then be back on the downside for retesting 141.59 low. Overall outlook will stay bearish as long as 147.14 support turned resistance holds.

In the bigger picture, current fall from 151.89 is seen as the third leg of the corrective pattern from 151.93 (2022 high). Deeper decline would be seen through 38.2% retracement of 127.20 to 151.89 at 142.45 to 61.8% retracement at 136.63. This will now remain the favored as long as 147.14 support turned resistance holds.

Daily Pivots: (S1) 0.8770; (P) 0.8793; (R1) 0.8807; More....

Intraday bias in USD/CHF is turned neutral first with a temporary top formed at 0.8819. Further rise remains in favor with 0.8727 minor support intact. Above 0.8819 will resume the rebound from 0.8665 short term bottom to 0.8886 support turned resistance first. Decisive break there will indicate that whole fall from 0.9243 has completed, and bring stronger rally to 0.9111 resistance next. However, break of 0.8727 will turn bias back to the downside to retest 0.8665 instead.

In the bigger picture, price actions from 0.8551 are currently seen as part of a corrective pattern to the decline from 1.0146 (2022 high). Fall from 0.9243 is seen as the second leg for now. Deeper decline could be seen to 0.8551 low but strong support should be seen there to bring rebound. Meanwhile, break of 0.9111 resistance will argue that the third leg has started already, and target 0.9243 and above.

Daily Pivots: (S1) 1.2529; (P) 1.2560; (R1) 1.2587; More...

Intraday bias in GBP/USD is turned neutral with a temporary low formed at 1.2501. But further decline remains mildly in favor with 1.2611 minor resistance intact. Below 1.2501 will resume the fall from 1.2731 short term top to to 55 D EMA (now at 1.2450). Sustained break there will bring retest of 1.2036 low. However, firm break of 1.2611 will turn bias back to the upside for retesting 1.2731 resistance.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to rise from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg, that could still extend through 1.2731. But upside should be limited by 1.3141 o bring the third leg of the pattern. Meanwhile, sustained trading below 55 EMA will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again, and possibly below.

Daily Pivots: (S1) 1.0744; (P) 1.0762; (R1) 1.0781; More...

Intraday bias in EUR/USD is turned neutral with a temporary low formed at 1.0722. Further decline is expected with 1.0816 minor resistance intact. Break of 1.0722, and sustained trading below 55 D EMA (now at 1.0770) will extend the fall from 1.1016 short term top to retest 1.0447 support. However, on the upside, above 1.0816 minor resistance will turn intraday bias back to the upside for stronger rebound.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 55 D EMA will argue that the third leg has already started for 1.0447 and below.

Daily Pivots: (S1) 1.3548; (P) 1.3576; (R1) 1.3603; More...

No change in USD/CAD's outlook and intraday bias stays neutral. On the downside, below 1.3547 minor support will argue that recovery from 1.3479 has completed. Intraday bias will be turned back to the downside for 1.3479 and below, to resume the decline from 1.3897. But downside should be contained by 1.3378 support, which is close to 61.8% retracement of 1.3091 to 1.3897 at 1.3399, to bring rebound. On the upside, break of 1.3625 resistance will indicate short term bottoming, and turn bias to the upside for stronger rise.

In the bigger picture, rise from 1.3091 is seen as the fifth leg of the whole rise from 1.2005 (2021 low). Further rally is expected as long as 1.3378 support holds, to 61.8% projection of 1.2401 to 1.3976 from 1.3091 at 1.4064. However, decisive break of 1.3378 will dampen this view and bring deeper fall back to 1.3091 instead.