Dollar (DXY) Softens After PCE Met Expectation, USDJPY Bulls Continue

July 1, 2024

■ The Dollar Index (DXY) soften slightly but not amounting to a reversal yet despite PCE soften to 2.6% from 2.8% in April 2024.

■ USD/JPY has met our short-term target after breaking above 160.00 psychological level. Next level to watch is at 163.74.

■ The US dollar index (DXY) is likely to strengthen to 105.60 in 2H24 considering the increasing hawkishness of the Fed.

Dollar Index soften on declining PCE number

The US Personal Consumption Expenditures (PCE) Price Index for report for May showed that headline inflation softened to 2.6% year-over-year, down from 2.7% in the previous month. Core PCE, which excludes the more volatile food and energy prices, also experienced a decline, dropping to 2.6% from April’s 2.8%. The in-line numbers has promoted the market that the Fed is likely back on track to further rate cut for 2H24, from one cut to two. However, we believe that the rate cut scenario is unlikely to come as other Fed committee members such as Austan Goolsbee, and Mary Daly has expressed the need for more data to see inflation coming back to 2%. We believe that this coming Thursday’s FOMC (0200hrs GMT+8) will likely maintain its stance on “more data needed” and not have any surprise as unemployment data on Friday will be the key. Unemployment is likely to maintain at 4% based on consensus but NFP may show a dip to 180,000 based on consensus view.

Japanese Yen back into the spotlight again after another Tokyo inflation data

Inflationary pressure is back after the Inflation in Tokyo saw a spike from 1.9% to 2.1%, exceeding the consensus forecast. The underlying inflation excluding food and energy also rose to 1.8%, from 1.7% in May. This rise in inflation in the country’s capital has further increased the odds of the BOJ hiking the interest rate going forward as explained in our previous report on 24 Jun 24. However, the attention will be in August where the BOJ will reduce its purchase of Japanese Government Bonds and the market will then “test” the commitment of the BOJ in its consistency to perform Quantitative tightening in 2H24.

Dollar Index technical outlook

We continue to maintain our view of a strong dollar despite softening last Friday after the result of the PCE numbers. The Dollar index has broken past the 106.00 psychological level and despite the weak closure, the Dollar did not exhibit strong bearish reversal. Furthermore, the momentum also suggests that the upside remain and hence, we maintain our mid-term target at 106.74 and should it break, the next major target will be at 109.49 over the longer course of the period. Major support is at 103.86-104.10 and 101.31 should there be a correction.

USDJPY continues to see strength going past 160.00 potentially

The USDJPY has broken past the 160.00 psychological target and touched 161.28 last Friday as expected from our previous report on 24 Jun 24. Currently, the USDJPY is trending right in the bull trap zone and there is a possibility of a correction. However, the technical and price action structure suggests that we could see another round of pushes to 163.00 region before a correction happens. Should a correction happen, the next key immediate rebound will be at 156.30. Major rebound will likely be at 154.70 or lower support at 151.97.

Figure 1: Dollar Index (DXY) – Short-term uptrend remains as bearish pressure is weak

 

Figure 2: USDJPY – Sustaining above 160.00 psychological level

Figure 3: Personal Consumption Index – PCE declined but yet to achieved 2% target

Figure 4: Unemployment rate – Inching closer to 4.2% Natural rate of unemployment

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