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USD/JPY bears are in town and a break of 134.50 is eyed

  • USD/JPY is on the backside of the prior bullish trend.
  • The US Dollar remains in favour on hawkish data.
  • The price is capped by the 135s so far and a move below 134.50 will be key for the week ahead. 

USD/JPY is trading offered in the afternoon on Wall Street and is down some 0.2% within the range of the day between 135.36 and 134.60. The US Dollar rose against its major trading partners on Thursday ahead of the release of an update to Q4 Gross Domestic Product growth (that missed expectations) and Weekly Initial Jobless Claims, (that beat expectations) as well as the Personal Consumption Expenditure (that also beat expectations) and was revised upward to 3.7%, indicating inflation was much stronger than initially thought and helping to stoke bearish sentiment among traders.

Consequently, US Treasury yields edged lower in choppy trading, with those on the 10-year pulling back from three-month highs. This occurred despite investors pricing in the strong economic data of late that commenced with the last Nonfarm Payrolls report at the start of this month. 

Benchmark 10-year Treasury notes were down at 3.881%, while the yield curve measuring the gap between the two- and 10-year Treasury notes was still inverted indicating a looming recession. Nevertheless, the US Dollar retained its strength against its major peers. The US Dollar index, which measures the greenback vs. a basket of currencies, DXY
climbed to a high of 104.779 before falling back to the 104.50s. The index is still up from the day's low of 104.308. 

The greenback is firmer on the prospect of further monetary policy tightening after the Minutes of the Jan. 31-Feb. 1 Federal Open Market Committee meeting released Wednesday showed only "a few" participants wanted a larger 50 basis point increase at the meeting. All in all, officials favoured a moderation in the pace of rate hikes although they indicated that containing high inflation would be key to how much further rates need to rise which makes Friday's PCE deflator a key red news event. Ahead of the event, the federal funds target rate band stands at 4.50% to 4.75%

Friday will provide the Fed’s favoured inflation measure, the PCE deflator. ''The market is expecting the January headline data to remain at 5.0% YoY, in line with the previous month,'' analysts at Rabobank said. ''This would strengthen concerns that the downtrend in inflationary indicators may have stalled. Data in line with market expectations would thus add further weight to the view that the Fed will have to work harder to push inflation back to its target level. Currently implied market rates are pointing to a peak in Fed funds close to 5.33%.''

USD/JPY technical analysis

USD/JPY is on the backside of the prior bullish trend but remains supported by the hourly bullish trendline. However, the price is capped by the 135s so far and a move below 134.50 will be key for the week ahead. 

Author

Ross J Burland

Ross J Burland, born in England, UK, is a sportsman at heart. He played Rugby and Judo for his county, Kent and the South East of England Rugby team.

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