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WEEK AHEAD: MAY 10

Short Description

This week ahead I’m thinking about how to trade USD/JPY around upcoming inflation data from the US and China, and also rundown the economic calendar. Thanks! Rich

Video Script

Hi everyone, welcome to my preview of the week ahead in forex and financial markets. The big worry in markets is still rising inflation, which makes this week’s US and China inflation data all the more important. My focus is on USD/JPY where in this video I’ll run through some technical analysis and the fundamental outlook for the dollar versus the yen. I’ll also run through the key events in this week’s economic calendar.

The main event of the week for me is US CPI data on Wednesday, which by modern standards, is expected to show a shock 3.6% rise in annual US inflation. The data and the market reaction could be a big moment for the direction of the dollar and all major forex pairs. The pre-amble to the US data is PPI from China on Tuesday, where prices out of the factory gate are expected to be up because of higher input costs, caused by the supply chain problems of the last year. I wouldn’t expect the market to be too rattled by the higher inflation since the Fed has already prepared us for what they say is ‘transitory’ inflation, which they do not plan to react to. The last thing I’d mention is UK Q1 GDP, which could be of note for the British pound.

Outside of the economic calendar, there are some big international earnings out from the likes of Alibaba, JD.com, BP, Toyota and SoftBank alongside big names from the US like Intel, Disney, Airbnb and Uber. 

Starting from a weekly chart, USD/JPY is potentially at an important turning point. The price has broken out from - and pulled back to - a 5-year down-sloping channel. A move to new highs for 2021 could confirm a new long-term uptrend. On the daily chart, price has bounced off a rising trendline after a steep drop but remains at risk of a steeper correction if there is another failure near 110.

Dollar-yen is especially interesting in terms of a way to play higher inflation expectations for the United States because Japan has been stuck in a deflationary environment for the best part of 30 years.  If there is one currency that tends not to benefit from higher global inflation expectations, it’s the Japanese yen. The uptrend in other yen pairs like EUR/JPY is already well-established but the bear market in the US dollar last year means USD/JPY is potentially still early in its uptrend. 

Janet Yellen caused a brief wobble in markets, and spike in the dollar last week, when she said that interest rates in the US might have to rise to stop the US economy overheating. She since walked back the comments but given President Joe Biden’s giant spending plans, plus the inflation that is already showing up due to goods shortages caused by the pandemic, its likely the Federal Reserve will tighten policy before the Bank of Japan, and that puts upward pressure on USD/JPY. 

How close the US inflation data this week is to expectations could determine whether USD/JPY fails at 110 and makes another leg lower, or breaks out to fresh yearly highs.

Right thanks everyone, good luck trading this week and make sure to subscribe so you don’t miss the next episode of the week ahead.
 

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