US dollar to dictate FX moves this week

The price action in the FX space was relatively subdued, with a mild USD pullback being the main theme.

USD/JPY has been very interesting to watch over the past week, pre and post the upper house election. With the situation in Japan seemingly improving, the yen has enjoyed some buying as investors grow increasingly optimistic about the Japanese economy. USD/JPY pulled back into the 99.29 region as the USD lost some ground after a disappointing existing home sales reading. Home sales were expected to rise 1.5%, but fell 1.2%. We feel any dips below ¥99 will be used as an opportunity to accumulate, given the Shinzo Abe put supporting the pair.

Tomorrow we have Japan’s trade balance numbers, where an improvement from the previous month’s trade deficit is expected. On Friday we have CPI numbers which will deserve some attention as the government continues to chase the 2% inflation target. EUR/USD actually managed to edge higher despite Portugal continuing to be an issue. Portuguese leaders failed to reach a national salvation pact but yields still cooled and EUR/USD pushed to a high of 1.322.

Later today we have consumer confidence data due out but it’s not until tomorrow when the data really ramps up; with several PMI readings due out. French, German and European services and manufacturing PMIs will be released.

GBP/USD remains elevated at around 1.536 and has been one of the best performers in the risk space. Thursday will bring the UK’s GDP numbers and any disappointment is likely to lead to some profit taking on cable. Looking at the daily chart of GBP/USD, the 61.8% retracement of the drop from mid-June to mid-July will be the level to look out for in the short term. The resistance kicks in at about 1.54.

Most of the volatility in the FX space this week is likely to come from US economic data as investors continue to reprice QE tapering. New home sales, durable goods orders and unemployment claims will be the key readings this week.

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