AUD/USD, USD/JPY: US inflation report set to enhance soft landing narrative

• The Fed’s preferred underlying inflation measure will be released later Friday
• On a six-month annualised basis, the data may confirm underlying inflation has returned to the Fed’s 2% target
• AUD/USD and USD/JPY have conveniently parked themselves near technical levels heading into the report

AUD/USD and USD/JPY sit at interesting levels on the charts ahead of Friday’s key US PCE inflation report, providing two-way optionality and decent risk-reward for those traders still active in the markets.

PCE inflation report likely to enhance soft landing narrative

With over six rate cuts now priced into the Fed funds rate curve for 2024, it’s up to the data to continue to show inflation is likely to return to the Federal Reserve’s 2% target. With the core PCE deflator – the Fed’s preferred inflation measure – expected to increase 0.2% in November, the year-on-year change is seen slowing to 3.3% from 3.5% in October. Importantly, on a six-month annualised basis, underlying inflation is tipped to show underlying inflation has returned to the Fed’s mandate.

While that outcome is factored into pricing, in the absence of a big upside surprise, or evidence services inflation excluding housing costs remains elevated, markets will be able to cling on to the soft-landing narrative, likely keeping US bond yields pressured amidst expectations the Fed ease policy rapidly to reduce the risk of deflationary forces taking hold.

In the absence of unexpected market news, the PCE deflator, along with the strength in incomes and broader consumer expenditure, will likely dictate how the AUD/USD and USD/JPY fair before Christmas.

AUD/USD eyeing 2023 highs

For those looking at trades involving AUD/USD, it has settled around .6800 heading into the inflation report. This minor support and resistance level can be used to initiate positions, with a stop on the opposite side to where the price move for protection. An upside break would target a push towards the double-top hit in June and July just shy of .6900. On the downside, .6720 and .6675 are the initial levels to watch.

USD/JPY testing recent lows

With the release of Japanese consumer price inflation and minutes of the Bank of Japan’s November monetary policy meeting vanishing into the distance in the rear-view mirror, attention now will be on the US inflation report. Like the AUD/USD, the USD/JPY, too, has conveniently parked itself around support, providing the opportunity to position for a bounce or break.

Dating back to July this year, the pair has either tagged or nearly tagged 141.56 of five occasions without closing below, suggesting it could be used for protection regardless of which way the price moves. If it bounces on the inflation report, traders could place a stop below targeting a push back to 144.80. Should the price break lower, a move towards 138.75 could be on the cards. On the way, it may encounter bids around the psychological 140 level. A stop above 141.55 would offer protection.

-- Written by David Scutt

Follow David on Twitter @scutty