Dollar was sold off broadly last week as a 25bps rate hike by Fed in February is now pretty much a done deal, after CPI data. On the other hand, Yen staged a strong rally on speculations that BoJ is now much closer to exit of ultra-loose monetary policy. USD/JPY ended as the biggest mover and more downside is likely ahead. But as argued below, from a medium term long term point of view, a bottom would be formed ahead awhile 120 handle is looking a bit stretched.

In between Dollar and Yen, Swiss Franc was the second worst performer, with upside breakout in EUR/CHF. Canadian Dollar was the third worst. On the other hand, Euro and Sterling were the next strongest one, with help from buying against the Swiss Franc, while Aussie was also strong.

25 looks like a done deal for Fed, S&P looking bullish

Traders are now pretty confident that Fed is going to slow down the pace of tightening at the upcoming meeting on February 1. A number of Fed officials already indicated the openness to a 25bps hike. CPI report released last week, showing further cooling in consumer inflation, solidified such expectations. Fed fund futures are now pricing in 93.7% chance of a 25bps hike to 4.50-4.75%. But of course, what matters more now is the terminal rate and the time to stay there, which will be data-dependent.

S&P 500 extended the rebound from 3764.49 and closed just shy of 4000 handle. The stay above 55 day EMA (now at 3897.48) is a near term bullish sign, which suggest that rise from 3491.58 is not over. Focus is back on 4100.96 resistance and break there will confirm this bullish case. More importantly, if that happens, 55 week EMA (now at 4022.44) would be taken out firmly too, which argues that whole correction from 4818.62 has completed. In this case, further rise would be seen back to 4325.28 (61.8% retracement of 4818.62 to 3491.58 at 4311.69) for confirmation.

FTSE marching to record high, DAX following

Risk-on sentiment was also firm in Europe. FTSE extended the bullish run and closed at another 3-yr high at 7844.06. Near term outlook will remain bullish as long as 7599.70 resistance turned support holds. Next target is 7903.50 record high, and possibly further to 61.8% projection of 5525.52 to 7687.27 from 6707.62 at 8043.58.

DAX finally resumed the rise from 11862.84. The strong support from both 55 day and 55 week EMAs affirm the case that correction from 16290.19 has already completed. Near term outlook will remain bullish as long as 14675.84 resistance turned support holds. Next target is 61.8% projection of 11862.84 to 14675.84 from 13791.52 at 15529.95. Sustained break there could prompt upside acceleration through 16290.19 record high, to 100% projection at 16604.52.

Dollar index extended decline, no sign of bottoming yet

Dollar index resumed the decline from 144.77 last week and closed at 102.20. The strong break of 55 week EMA is clearly a bearish signal, and there is no clear sign of bottoming yet. Yet, it’s now close to 50% retracement of 89.20 to 114.77 at 101.98. A rebound could happen any time. But of course, break of 105.65 resistance is needed to indicate short term bottoming first, or outlook will stay bearish. Sustained trading below 101.98 would open deeper fall to 61.8% retracement at 98.96 or even further to 55 month EMA (now at 97.32), before DXY could find enough support.

Gold cleared 1900, 2000 next

Gold continued to ride on Dollar’s weakness and surged through 1900 handle. Near term outlook will now stay bullish as long as 1866.94 support holds. With 100% projection of 1616.51 to 1786.63 from 1728.48 at 1898.80 taken out. Next target is 161.8% projection at 2004.05.

Additionally, it should be noted that long term consolidation pattern from 2074.84 (2020 high) could have completed with three waves down to 1616.51, after drawing support from 55 month EMA. It’s still a bit too early. But we’re penciling in the chance of long term up trend resumption to new record high, and target 61.8% projection of 1160.17 to 2074.84 from 1616.51 at 2181.77 later in the year.

USD/JPY dived on BOJ speculations, but decline should slow below 125.58

Yen was shot higher by speculations that BoJ is getting closer to abandoning yield curve control, eventually readying itself for rate hike later in the year. The expectations intensified after Yomiuri newspaper reported that policymakers would review the side effects of the YCC at the upcoming meeting on January 18 (coming Wednesday).

At the same time, bond trades continued to push 10-year JGB yield through BoJ’s cap of 0.50%. That’s not exactly a new thing, as it happened before when the cap was at 0.10% and 0.25%. But this time, BoJ spent a record JPY 4.6T on bond purchases to defend the cap on Thursday. Additionally, unscheduled purchases were carried out on Friday, spending JPY 1.4T on 1 to 25 year bonds in the first round, and then offered to by JPY 400B of 3 to 25 year bonds in the second round.

Opinions are divided on what BoJ would exactly do at the January meeting. Most economists still predict no policy change. Some expects a further increase in the yield cap to 0.75%, setting the stage for scrapping YCC at Governor Haruhiko Kuroda’s last meeting, and rate hike when new governor comes in. But in any case, the path is there, just the timing is uncertain.

USD/JPY was the biggest mover last week, losing -3.32%. From a near term point of view, further decline is expected through 61.8% projection of 151.93 to 133.61 from 138.16 at 126.83 pretty soon. However, from a long term point of view, a cluster support zone lies just ahead, with 125.58 (2015 high), 61.8% retracement of 102.58 to 151.93 at 121.43, and 38.2% retracement of 75.56 to 151.93 at 122.75.

The decline should start to slow down again breaking 125.58. A bottom would possibly form at 121.43/122.75. 120 psychological level looks a bit stretched based on this week, not to mention 100% projection of 151.93 to 133.61 from 138.16 at 119.84

EUR/CHF Weekly Outlook

EUR/CHF’s rise from 0.9407 finally resumed by breaking through 0.9953 last week, and hit as high as 1.0095. But as a temporary top was formed with subsequent retreat, initial bias is turned neutral this week first. Downside should be contained by 0.9953 resistance turned support to bring another rally. Break of 1.0095 will resume the rise to 100% projection of 0.9407 to 0.9953 from 0.9720 at 1.0266 next.

In the bigger picture, break of 38.2% retracement of 1.1149 to 0.9407 at 1.0072 and 55 week EMA (now at 1.0041) is taken as an initial sign of long term bullish reversal. Further rally is expected as long as 55 days EMA (now at 0.9866) holds. Next target is 1.0505 cluster resistance (2020 low at 1.0505, 61.8% retracement of 1.1149 to 0.9407 at 1.1484). Reactions from there should reveal long term momentum.

In the long term picture, it’s still way to early too call for bullish trend reversal with upside capped well below 55 month EMA and 1.0505 support turned resistance (2020 low).