Calmer Markets Shift Focus to US PCE Inflation Data

The forex markets have calmed down considerably in Asian session after a week of significant wild ride. Despite the pause, the risk-averse sentiment persists. Yen, which has led the charge this week, is starting to take a breather. It remains the runaway leader, followed by Swiss Franc and then Dollar. Meanwhile, New Zealand Dollar has overtaken Australian Dollar as the worst performer, with Canadian Dollar trailing as a distant third. Euro and Sterling are trading in the middle of the pack, with Euro showing a slight edge.

Today’s spotlight is on US PCE inflation report. Both the headline and core PCE are anticipated to decrease to 2.5% in June, mirroring the CPI report’s indication of ongoing disinflation. A 25bps rate cut by Fed in September is fully priced in by the markets. The primary question has shifted to whether Fed will implement two or three rate cuts this year. Fed fund futures currently suggest there is a 60% chance that the federal funds rate will end the year at 4.50-4.75%, a reduction of 0.75% from the current level.

Technically, Bitcoin rebounded notably after dipping to 63421 earlier in the week. The strong support from 55 D EMA so far is keeping the bullish case alive. That is, consolidation from 73812 has completed with three waves down to 53426. Larger up trend is ready to resume towards 61.8% projection of 24896 to 73812 from 53426 at 83686. Let’s see how it goes.

In Asia, at the time of writing, Nikkei is up 0.02%. Hong Kong HSI is up 0.01%. China Shanghai SSE is down -0.24%. Singapore Strait Times is down -0.01%. Japan 10-year JGB yield is down -0.014 at 1.060. Overnight, DOW rose 0.20%. S&P 500 fell -0.51%. NASDAQ fell -0.93%. 10-year yield fell -0.030 to 4.256.

Tokyo CPI core rises, but core-core falls; BoJ rate hike uncertainty persists

Japan’s Tokyo CPI core (excluding food) increased from 2.1% yoy to 2.2% yoy in July, aligning with market expectations. This marks the third consecutive month of re-acceleration following a dip to 1.6% yoy in April. The primary driver of this uptick was energy prices, with electricity costs soaring by 19.7% yoy due to the termination of government utility subsidies.

However, other inflation measures showed a slowdown. CPI core-core (excluding food and energy) dropped from 1.8% yoy to 1.5% yoy. Additionally, services inflation decreased from 0.9% yoy to 0.5% yoy, while headline CPI fell slightly from 2.3% yoy to 2.2% yoy.

The increase in core inflation maintains the possibility of a BoJ rate hike next week. However, the current data is not sufficiently conclusive to confirm this outcome. Swap markets indicate a 38% probability of a 15bps hike. A Bloomberg survey reveals that 30% of BoJ watchers anticipate a hike, with 90% viewing it as a potential risk.

Looking ahead

Main focus ahead is US personal income and spending, and PCE inflation.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 165.33; (P) 166.46; (R1) 168.09; More…

A temporary low should be in place at 164.81 with current recovery. Intraday bias in EUR/JPY is turned neutral first. But risk will stay on the downside as long as 169.98 support turned resistance holds. On the downside, decisive break of 164.29 support turned resistance will indicate that larger scale correction is underway for 155.91 fibonacci level.

In the bigger picture, immediate focus is now on 164.29 resistance turned support. Strong rebound from there will retain medium term bullishness for resuming the up trend through 175.41 at a later stage. However, decisive break of 164.29 will indicate that fall from 175.41 is at least correcting the rise from 124.73, with risk of bearish trend reversal. Deeper decline would be seen to 38.2% retracement of 124.37 to 175.41 at 155.91.

Economic Indicators Update