USD/JPY: Βetween the hammer and the anvil

USD/JPY caught FX traders’ attention today as there was an abrupt movement lower during today’s Asian session. Market analysts were quick to point out the possibility of a market intervention by the Japanese Government, yet the story is not over for the pair as more events are expected during the week and could rock the pair.

JPY’s weakness

On the fundamental side we note JPY’s weakness that was enhanced by BoJ’s interest rate decision

during Friday’s Asian session. On a monetary level, BoJ released its interest rate decision and remained on hold, keeping rates at 0-0.1%. Also, the bank highlighted its conviction that inflation rates are to remain near the bank’s targets, in a rather optimistic note. The bank also tended to signal that it’s prepared to hike rates further near the end of the year. Yet at the same press conference BoJ Governor Ueda also stated that the bank is to maintain easy financial conditions for the time being. Overall, the lack of clear forward guidance, given that the accompanying statement was exceptionally short, even for BoJ’s standards, tended to weaken the JPY further.  Furthermore, Tokyo’s CPI rates for April slowed down beyond market expectations, foreshadowing further easing of inflationary pressures in the Japanese economy as a whole. All of that tended to weigh on JPY on Friday allowing for USD/JPY to rise considerably. Today during the Asian session, we noticed a strong buying of the JPY in a suspected market intervention by the Japanese Government. Despite some analysts mentioning the possibility that the effect may be magnified as Japanese markets are closed today, for the Showa Day public holiday, we expect that the effect may prove to be temporary given that the fundamentals underpinning JPY’s weakness, namely the BoJ’s loose monetary policy is still there.

USD strength

On the flip side of the pair the USD seems to remain strong against its counterparts, as the PCE price index for March, both on a headline as well as on a core level, failed to slow down on Friday, implying a persistence of inflationary pressures in the US economy. The release may add pressure on the Fed to maintain a more hawkish stance, while the market may start to reposition itself ahead of the Fed’s interest rate decision on Wednesday. The bank is widely expected to remain on hold and currently Fed Fund Futures (FFF) tend to imply a probability of 97.9% for such a scenario to materialise. Hence we expect the market’s attention to turn towards the accompanying statement and Fed Chairman Powell’s press conference for any clues regarding the bank’s future intentions. It should be noted that FFF also imply that the market expects the bank to start cutting rates in the September meeting. Yet inflation seems to be sticky and may be adding pressure on the bank to maintain rates high for longer. Should the bank’s forward guidance imply a possible delay of any rate cuts we may see the market’s expectations being contradicted and the USD getting some support. The second market-moving event this week for the USD side of the pair, is expected to be the release of the US employment report for April on Friday. Overall forecasts are for the NFP figure to drop and the unemployment rate to rise, implying an easing of the US employment market that may in turn ease the hawkishness of the Fed and thus weigh on the greenback. Yet there is a wide degree of uncertainty regarding the actual release, as the rates and figures of the report took the markets by surprise a number of times in the past months and should the US employment market prove to be more resilient than forecasted, we may see the USD getting additional support. 

Technical analysis

USD/JPY daily chart

Support: 155.80 (S1), 153.80 (S2), 151.90 (S3).

Resistance: 158.35 (R1), 160.35 (R2), 163.00 (R3).

We note the inconsistency of today’s movement, as USD/JPY oscillated between 160.35 and 154.50, presenting the unusual volatility of around 600 pips. Despite the correction lower, the pair seems to maintain some bullish tendencies, as the RSI indicator dropped yet remained close to the reading of 70, implying still the presence of a bullish sentiment among market participants. At the same time, the upward trendline guiding the pair’s price action despite being briefly broken, has held its ground and the false break tends to underscore its validity rather than the opposite. Furthermore, the 20 moving average (MA) (median of the Bollinger bands, Blue line), the 100 MA (Green Line) and 200 MA (Orange line) all continue to point upwards supporting the upward motion of the pair. Hence we tend to maintain a bullish outlook for the pair on a purely technical level, albeit some tendencies for stabilisation seem to also be present after the wide correction lower. Should the bulls maintain control as expected we may see the pair, breaking the 158.35 (R1) resistance line, setting in its sights the 160.35 (R2) resistance line, a level that was tested during today’s early Asian session. Should the pair stabilise we may see it confining its price action between the 158.35 (R1) resistance line and the 155.80 (S1) support level. For a bearish outlook, however improbable that may be, it still is a possibility and should be covered, hence we would require USD/JPY to drop, breaking the prementioned upward trendline clearly, in a first signal of an interruption of the upward movement and the pair to continue lower to break also the 155.80 (S1) support line as well as actively aim if not breach also the 153.80 (S2) support base.