Asia Day Ahead: USD/JPY recovery eases, gold prices on watch ahead of US CPI

Market Recap

Major US indices managed to close in the green overnight amid a cautiously-traded session (DJIA +0.43%; S&P 500 +0.39%; Nasdaq +0.20%), with all three indices sitting on their year-to-date high ahead of the upcoming US consumer price index (CPI) data release. The positive performance may be a surprising feat, given that all “Magnificent Seven” stocks ended the day lower, which suggests more broad-based catch-up in the other constituents.

Nevertheless, all attention will be on the US CPI data today to potentially set the tone for US policymakers at their upcoming meeting. The November Federal Reserve (Fed) minutes showed that US policymakers were still concerned that inflation could be stubborn, leaving the door open for additional tightening if needed. Therefore, further inflation progress will be on watch to validate the effectiveness of current restrictive policies in place and give more room for the Fed to consider rate cuts in 2024 if economic conditions worsen.

Year-on-year, US headline inflation is expected to tick lower to 3.1% from previous 3.2%, while core inflation may stay unchanged at 4.0%. Barring any significant upside surprise, further rate hold from the Fed this week is likely a done deal, but the 100-125 basis point (bp) cuts in 2024 may seem overly aggressive for policymakers’ comfort, leaving the potential risks of pushback on the table.

For now, the US dollar continues to find resistance at the neckline of an inverse head-and-shoulder formation on its four-hour chart at the 103.85 level. Breaking above this level may be key to pave the way for further upside towards the 105.00 level, where heavy resistance may be expected from the Ichimoku cloud zone on the daily chart. On the downside, the 103.00 level will serve as immediate support to hold.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.65%, ASX +0.42% and KOSPI +0.33% at the time of writing. Sentiments largely took the lead from Wall Street for an edge higher, with cautious optimism in place that further inflation progress in the US may help to provide some validation for current market dovish rate pricing.

Economic data this morning saw Japan’s wholesale prices rose 0.3% in November – a significant slowdown from the previous 0.9%. Given its general positive relationship with Japan’s core CPI on the cost pass-through effect to consumers, less upward pressures on consumer prices could see the Bank of Japan (BoJ) adopt its current patient stance of policy normalisation at the upcoming meeting. Current market pricing are looking at 2Q 2024 as the period of exit for Japan’s negative interest rate policy.

The USD/JPY has pared back much of its 7 December dip, as bearish positions unwind on views that previous hawkish expectations may have been overdone. This comes as BoJ officials continue to seek for the conviction on their wage-growth condition to be confident of meeting ‘sustainable inflation’ for a policy pivot. For now, the USD/JPY has managed to find support off its 200-day moving average (MA), but a breakdown of an ascending channel pattern in place suggests that the bears may continue to put in a fight ahead. On the downside, the 200-day MA around the 145.00 level may be crucial support to hold, while the bulls may have to revert back above the lower channel trendline in order to show conviction of them taking greater control.

On the watchlist: Gold prices on watch ahead of US CPI

Dovish expectations for a series of Fed rate cuts in 2024 have carried gold prices to a new all-time high briefly last week, but gains eventually failed to sustain into the close with heavy profit-taking in the days after. Some may argue that the 100-125 bp cuts priced for 2024 may have been overdone, leaving all eyes on the upcoming US CPI data and subsequent Federal Open Market Committee (FOMC) meeting to provide any validation for such pricing.

Having dipped back below its key psychological US$2,000 level to start the week, the level will serve as immediate resistance for buyers to reclaim. On the downside, its Ichimoku cloud support on the daily chart may be a crucial resistance-turned-support area to hold, having successfully overcome it back in October after a series of failed attempts since June this year. That may leave the support confluence at the US$1,940 level on close watch.

Monday: DJIA +0.43%; S&P 500 +0.39%; Nasdaq +0.20%, DAX +0.21%, FTSE -0.13%