USD/JPY selling recedes ahead of PCE inflation, crude oil slips in a gain

US growth far surpassed expectations in Q2, rising 2.8% q/q compared with 2% estimated and 1.4% prior. Core PCE prices increased at a slower pace than feared at 2.9% q/q, although slightly above the 2.7% previously. Personal spending was also a beat at 2.3%. Overall, this plays into the soft landing scenario the Fed are aiming for and does little to derail expectations of a cut in September, although there has been some speculation that they could move as soon as next week (which I doubt they will, for what it is worth).

Wall Street initially rose on the back of the data, but sold off in the final hours of the day as tech stocks continued to weigh on sentiment. The S&P 500 and Nasdaq 100 fell for a third day although downside momentum is clearly easing.

Crude oil prices embraced the combination of higher growth, rising 0.9% and hinting at a swing low and move towards $80.

Gold failed to provide the mean reversion I sought yesterday, falling -1.4% alongside silver's -3.8%. Although copper prices finally printed a small bullish day to snap an 8-day losing streak, its longest bearish sequence since February 2020. As suspected, prices are holding above $4 on reports of Chinese buying, a level I expected to be well defended for now.

AUD/USD failed to take the commodity bounce from copper and oil prices, falling for a 9th consecutive day during its worst run since March 2020. Currently down -2% since Friday, AUD/USD is on track for its worst week since November and worst month since January.

Events in focus (AEDT):

With renewed bets that the Bank of Japan could hike next week (even if overly optimistic), it leaves the yen vulnerable to further strength should Tokyo CPI come in hot today. It provides a 3-week lead over nationwide CPI after all. And that could pair nicely for yen bulls should US PCE inflation come in nice and soft later today. Although even if there is an upside surprise with PCE data, it would have to beat expectations by quite some margin to dispel expectations of a September cut. But it could boost calls for a 50bp cut should they come in soft.

• 09:30 – Tokyo CPI
• 12:30 – SG unemployment rate
• 13:35 – Coincident, leading index
• 15:00 – SG industrial production
• 18:00 – BOE quarterly bulletin
• 20:00 – CN foreign direct investment
• 22:30 – US core PCE, personal consumption, personal income
• 00:00 – US consumer sentiment (University of Michigan)

USD/JPY technical analysis:

The US dollar has fallen over 6% from the July high to low. Whilst that range spans 16 days, most of the selling came over 4 which began with the first of at least two suspected MOF interventions. Their timing has clearly worked out well for them. However, with a key support level holding and a bullish reversal candle forming, bears may want to take caution around these lows.

Thursday’s low found support almost perfectly at the 200-day EMA, 2022 MOF intervention level and 152 handle. A bullish pinbar formed on the daily chart with an RSI (2) within the oversold level, and the RSI (14) reached its own OS level the day prior.

The 1-hour chart shows a bullish divergence formed ahead of the strong rally from the lows, accompanied with strong volumes to show bullish initiation.

The path of resistance could be higher, with low-volatility dips within yesterday’s range potentially offering an increased reward to risk ratio for bulls, while prices remain above Thursday’s low. A cluster of resistance levels around 155.50 including the weekly S1 pivot and 100-day EMA make a potential target for bulls to monitor.

A downside risk for USD/JPY (and the dollar in general) is if PCE inflation data comes in softer than expected later today.

WTI crude oil technical analysis:

A 3-bar bullish reversal pattern has formed on the WTI crude oil daily chart (morning star), which carries extra weight being around the 2000-day EMA. Moreover, the daily chart failed to close below it two days this week, and the lower spikes held above the 200-day MA and show demand below 76.50. Yesterday’s candle was also accompanied with highest volume in 24 days.

The 1-hour chart shows a bullish divergence formed ahead of the strong rally from the weekly S2 pivot, and high volumes appeared around the cycle lows. Like USD/JPY, pullbacks within Thursday’s range could improve the potential reward to risk ratio for bulls, who could seek the 79 and 80 handles as upside targets. Note the monthly pivot point at 77.37 or 200-day EMA at 76.70 that could provide support for any such pullback.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge