The dollar rallied on strong economic data, a dovish Draghi and growing expectations for a blockbuster NFP number tomorrow. The dollar advance was strong against all of its major trading partners as the taper talk returns. Continued optimism in the U.S. economy may continue and the USDJPY may have best momentum going forward.
Employment is starting to look better in the U.S. as jobless claims declined to the lowest level since January 2008 and the employment index in today’s ISM manufacturing report climbed 5.7% to 54.4. The ISM report also said, “Business conditions remain stable, possibly improving somewhat in future months”. The headline number for ISM MFG index also printed at 55.4, well above consensus range of (52.1-53.5).
The dollar also firmed up after Mario Draghi signaled rates to remain low for an “extended period.” While he did highlight the improvements in the banking sector and that capital inflows are still occurring, the overall tone of the statement was dovish as rates will remain low for a while and we will have to wait and see if things get worse before the ECB may unleash other tools of accommodation.
Since the first day of summer, USDJPY has traded in a wide range of (97.00 – 101.50). This week price stabilized around the 97.50 region before advancing towards and above the 50-day simple moving average which currently resides near 98.86. If price is able to accelerate its gains after tomorrow’s jobs number and close above our downward sloping trend line (shown in white), which is around 100.20 for at least an hour, we may see a potential breakout targeting 102.85 area. It is around that level that we could see a bearish butterfly pattern emerge and target a major correction.