USD/JPY is looking to test the topside in early US trade, with the pair drifting up towards 121.15. Dollar shorts were frustrated in the European morning, with the pair unable to extend losses despite a clean break of 121.00. It makes sense that intra-day players would favour profit taking ahead of today's US Bernanke testimony.
However, Bernanke is widely expected to acknowledge that inflation risks remain on the topside, which provides little in the way of fresh insight for the dollar direction. The surprise could come from the growth outlook after a series of below trend readings.
The dollar could come back under pressure if Bernanke cites growth concerns, further reinforcing the soft landing scenario. These risks will undoubtedly reduce speculative activity and we do not think that USD/JPY has much upside potential ahead of the 15:00GMT testimony. Offers at 121.30/35 remain intact; and even if stops give way above there is another batch of good sell orders at 121.50.
Recent risk reduction and positioning adjustment favours further USD/JPY losses, reinforced by the bearish technical picture now and defensive JPY trading ahead of tomorrow"s Japanese GDP release. In this respect we see potential for a test of 120.70-80 bids and further interest below at 120.50/55.
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