Dollar eases on profit taking ahead of an important week

Black Friday means financial markets will close earlier than usual today, but don’t despair as there is a lot to look forward to next week. As well as the much-anticipated OPEC-meeting and top-tier Chinese economic data, we will also have important macro pointers from the worlds’ largest economy, which should provide the clearest indication yet if the Fed will indeed raise interest rates come December 14. Next week’s US data will include GDP, ISM services PMI and nonfarm payrolls, among others.  Ahead of these important events, it appears as though investors have been lightening up their long dollar positions, which makes more sense in this shortened trading week for US investor in particular. Consequently, the USD/JPY has eased while the EUR/USD and buck-denominated gold have bounced back.

But overall, the dollar remains well-supported and its weakness could very well turn out to be temporary. After all, which other major central bank is as hawkish as the Fed? Yes, a December rate rise may already be priced in, but what about further hikes in 2017? Obviously we will have to wait for the Fed’s so-called dot-plots to find out the expected path of future rate rises. But if economic data continues to remain positive coupled with Donald Trump’s promise of fiscal spending spree next year, inflation could rise faster than the market or the Fed currently projects. Thus, the Fed’s tightening cycle could be more aggressive than expected.  This could help keep the dollar underpinned, especially against currencies where the central bank is still dovish, like the Japanese yen.

In any event, the USD/JPY rally may have further momentum left in it, even if the RSI points to severely overbought conditions. At the moment, the USD/JPY is bang in the middle of nowhere in terms of key prior reference points. It has taken out all the near-term resistance levels, which could turn into support upon re-test. However one particular area that needs to be watched going forward is around the 116 area. As can be seen, this was previously a major support level and it comes in just above the long-term 61.8% Fibonacci retracement. In addition, 116 roughly marks the measured-move objective of the triangle breakout. Thus, given the convergence of these technical factors, we may see the USD/JPY respond to that level, at least more so than it has done around the other resistances that it has already taken out. That’s assuming we will get there in the first place, of course. In terms of support, 112.50 is the first one to watch, followed by a more significant area between 111.00 and 111.90, which had been resistance in the past.  Only if and when price moves below this area will we abandon our short-term technical bullish bias.