The year of 2019 started quite rapidly: the US currency continues to swoop down, and defensive instruments are still in significant demand. On the market, one can increasingly hear the phrase that "the era of an expensive dollar is coming to an end" and the current year will be marked by a weakening of the greenback.
In my opinion, it is still too early to draw such long-term conclusions, however, the trends of recent weeks cannot be ignored. The dollar index for December fell from 97 points to 95.46, reflecting the traders' pessimism about the prospects for the US currency. Flywheel greenback sales began to spin after the December meeting of the Fed at which members of the regulator announced a slowdown in monetary policy tightening. Dollar pairs reacted differently to this news but the main beneficiary of the situation was the Japanese currency, which paired with the dollar just today updated semi-annual minimums.
Last week, the USD/JPY pair was getting to the rather powerful, psychologically important level 110.00. The bears approached the boundaries of this level several times but each time they bought the pair, the price returned to previous levels. Yet, on the first working day after the New Year, the southern impulse increased markedly, after which the bears not only entered the 109th figure but also pushed the price to the level of 108.70. In other words, the USD/JPY pair has a serious potential for further decline: the nearest support level is at around 106.80, which is the bottom line of the Bollinger Bands indicator on the monthly timeframe.
Such a rapid decline dynamics is explained by several fundamental factors. Firstly, it's Chinese statistics, secondly, prospects on Brexit are still in doubt. Against this background, the role of defensive assets increased substantially, after which the yen became a temporary favorite in the market. In turn, the dollar is under the yoke of its own problems, starting from a domestic political conflict that led to a shutdown and ending with a decline in yield of treasuries. This figure fell to a mark of 2.67%, that is, to an annual minimum.
Plus, the overall pressure on the dollar is exerted by the dovish position of the Fed, whose members agreed to slow down the pace of the rate hike this year. Moreover, on the horizon, a neutral rate level loomed, which may be below three percent. In other words, the American regulator is completing the cycle of tightening monetary policy amid a slowdown in the country's main indicators of the economy. Here, it is appropriate to recall that Jerome Powell in 2019 will hold press conferences after each of the eight Fed meetings. Therefore, we can find out already on January 30 the amended position of the Fed head regarding the prospects for monetary policy. If he confirms the main theses of the December meeting, the dollar will again go to the peak.
Back to the Japanese currency, today's revaluation is associated with an increased demand for protective tools as mentioned above. Here China played its role, which this week published rather weak releases. On Monday, we learned the data of the PMI index for the manufacturing fell to 49.8 points. Which is the worst result for the last year. Let me remind you that the values below the 50th mark indicate a slowdown in the relevant sector of the economy.
Today there was another blow from the Chinese statistics: PMI Caixin / Markit manufacturing activity index was also in the reduction zone, falling below 50 which was the first time since the spring of 2017. Such figures indicate a slowdown in the growth of Chinese industry and this fact may affect the dynamics of the global economy as many experts have already warned several times. The US economy will not be an exception either, especially given the completion of the effect of tax reform and the negative impact of the US-China trade conflict. Such prospects again correspond to the prospects of the monetary policy of the Fed. I guess it's not for nothing that Jerome Powell recently warned that "US statistics in 2019 will not be so favorable to the forecasts of the regulator, as it was in 2018."
Thus, the general fundamental background for the dollar remains negative. In the context of the USD/JPY pair, the southern price trend is further enhanced by the demand for protective tools. However, it should be warned that during the American session for today, a northern price rollback is possible. Donald Trump invited the leaders of both parties of the House of Representatives and the US Senate to a meeting where he would try to convince lawmakers to allocate five billion dollars to the border wall next year. If this meeting ends in success for the American president (which is unlikely), then the dollar will slightly restore its position in the entire market.
Otherwise, the USD/JPY pair will continue the southern route. On the technical side, there are no barriers in reducing the price down to 106.80 (the bottom line of the Bollinger Bands on MN).
The material has been provided by InstaForex Company - www.instaforex.com