- USD/JPY extended its sideways/consolidative price move for the second straight day on Tuesday.
- The Fed-BoJ policy divergence, the risk-on impulse undermined the JPY and extended support.
- Modest USD weakness held back bulls from placing fresh bets and capped the upside for the pair.
The USD/JPY pair struggle to gain any meaningful traction and remained confined in a narrow trading band, around the 135.00 psychological mark through the early European session on Tuesday. This subdued price action for the second successive day marks a consolidation phase following the recent strong bullish run to a 24-year high touched last week.
The widening Japan-US interest rate differential, along with the risk-on impulse, undermined the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair. It is worth recalling that the Bank of Japan (BoJ) on Friday decided to leave its ultra-easy monetary policy settings unchanged and reiterated its guidance to keep borrowing costs at "present or lower" levels. The Japanese central bank also pledged to guide the 10-year yield to around 0%.
In contrast, the Fed last week delivered the biggest hike since 1994 and indicated a faster policy tightening path to tame surging inflation. Moreover, the Fed's so-called dot plot showed that the median year-end projection for the federal funds rate moved up to 3.4% from 1.9% in the March estimate and 3.8% in 2023. This led to a fresh leg up in the US Treasury bond yields, which was seen as another factor lending support to the USD/JPY pair.
The fundamental backdrop favours bullish traders, though modest US dollar weakness kept a lid on any meaningful upside for the USD/JPY pair, at least for the time being. Even from a technical perspective, the USD/JPY pair, so far, has been struggling to make it through the 135.50-135.60 resistance zone. This makes it prudent to wait for strong follow-through buying before positioning for any further near-term appreciating move.
Market participants now look forward to the US economic docket, featuring the release of Existing Home Sales later during the early North American session. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab short-term opportunities.
Key levels to watch
Sustained strength beyond the 135.50-135.60 area would be seen as a fresh trigger for bulls and allow the USD/JPY pair to reclaim the 136.00 round-figure mark for the first time since 1998. The subsequent move up has the potential to lift spot prices towards the next relevant hurdle near the mid-136.00s.
On the flip side, the overnight swing low, around mid-134.00s now seems to protect the immediate downside ahead of the 134.30-134.20 horizontal support. This is closely followed by the 134.00 round figure, which if broken decisively might prompt aggressive long-unwinding trade around the USD/JPY pair.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.