Expansive ISM, hot GDP estimate leaves no wriggle room for Fed doves

You’ll be forgiven for not realising that economic data was released on Monday, amid the influx of trade war headlines. But if US growth estimates and manufacturing are anything to go by, we’re in for another hot ISM services print later this week.

It has been another volatile start to the week with Trump’s trade war at the helm. But while global indices were broadly lower alongside appetite for risk, they did recover from their early-Asian lows as traders saw light in ongoing discussions between Trump, Mexico and Canada. And this allowed Wall Street indices to retrace much of their bearish steps and close less than -1% lower (as opposed to the -2% moves originally seen).

Clearly, headline risks around Trump’s trade war will remain a key driver for risk appetite this week, so it would be wise to remember that volatility cuts both ways. For risk to truly bounce, a trade truce needs to be reached. I ‘m not sure it can happen this week, which leaves risk of further downside for indices and inflows to the yen for safety. But should one arrive, we could be in for one heck of a bounce. And given the strong data from the US and likelihood of traders dumping the yen, USD/JPY could fly.

Another solid ISM services report could be on the horizon

You’ll be forgiven for not realising that economic data was released on Monday, amid the influx of trade war headlines. But if US growth estimates and manufacturing are anything to go by, we’re in for another hot ISM services print later this week.

• US G1 GDP is estimated to have risen to 3.9%, its highest level in nine months and a full percentage-point above the 2.9% estimated
• ISM manufacturing expanded for the first time since September 2022
• The ‘prices paid’ component rose to an 8-month high to show inflationary pressures are rising and not limited to the services sector
• New orders also expanded

To see manufacturing expand for the first time in over two years with rising new orders and pries paid shows that the building inflationary pressures are broad based, and not limited to the services sector. Remember, ISM 'prices paid' accelerated to a near 2-year high of 64.4 in December, so that will be a key metric to watch this week, amid the trade war chaos of course.

Economic events in focus (AEDT)

If I were one of the several Fed members scheduled to speak this week, I would seriously consider rescheduling. I mean, what the heck are they really going to say of any value? Data is not allowing the dovish tilt that markets want to hear. And while the trade war is kicking off, it's still within its infancy and therefore keeps the Fed's hands tied.

We have a quiet economic calendar for today’s Asian session, but with Trump getting back into his late-night social posts, it means traders need to remain vigilant for any updates to his tariffs and any associated headlines.

• 10:50 – JP monetary base (BOJ)
• 14:35 – JP 10-year JGB auction
• 21:00 – UK 5-year treasury gilt auction
• 02:00 – JOLTS job openings, durable orders, factory orders
• 02:10 – US economic optimism (Feb)
• 03:00 – FOMC member Bostic speaks

USD/JPY technical analysis:

While USD/JPY is holding above the high-volume-node (HVN) support level, it can neither muster up the strength to rally or break beneath it.  Clearly both the US dollar and Japanese yen are acting as a safety play, which is effectively keeping the pair stuck within a choppy range. Still, it does still have a potential falling wedge pattern in play, which assumes a return to its high ~158.5.

As suggested above, some sort of a trade truce is required for USD/JPY to truly rally, as it could see traders throw their safe-haven yen play over board and refocus on strong US data and higher interest rates.

But until then, traders may want to remain nimble on lower timeframes, and seek dips around support or or fade into resistance.

The 1-hour chart has a small bear flag developing, so perhaps a dip towards 154 could be on the cards for bears seeking downside momentum. Alternatively, bulls could seek dips down to ~154 on the assumption that prices will remain within yesterday’s range over the near term.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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