USD/JPY Cautious after its Best Week in More Than 5 years, Despite Dovish BoJ Rhetoric


Renewed Fed Hawkishness

The US central bank had delivered its second straight rate hike in May and had hinted at more 50 basis points moves over the next two meetings, as communicated by Char Powell in the relevant press conference, as well as the accounts of that meeting that were published later in that month. [1]

Inflation has shown some moderation recently, with the central bank's preferred gauge – the Core PCE – easing to 4.9% in April year-over-year, from 5.2% previous, while the economy contracted by 1.5% in the first quarter. Furthermore, last Friday's data showed that Unemployment stayed at 3.6% in May, while a robust 390,000 jobs were added, which however was lower than the previous NFP print (+436K revised).

Last week we saw a series of Fed officials, reasserting the bank's hawkishness and commitment to fighting inflation, while offering hints in regards to their intentions beyond July.

Ms Mester (voter) spoke on CNBC after the jobs report and commented that "having the headline number come in a little bit lower than the previous month is a good thing, but it's too soon to say that that's gonna change our outlook or my outlook on policy".

In regards to the September meeting, Ms Mester is "not in that camp that we think we stop in September" and she could "easily be at 50 basis points in that meeting". [2]

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This echoes similar statements last week from Vice-Chair Ms Brainard who said "Right now, it's very hard to see the case for a pause" [3] and Governor Waller who supported more 50 basis points hikes for "several meetings" and interest rates "at a level above neutral" by the end of this year [4].

Bank of Japan Stays Dovish

Recent Inflation data from Japan, showed that the Consumer Price Index excluding fresh food surged to 2.1% in April (year-over-year), from 0.8% prior. This is above the central bank's 2% target and exceeds its median forecast for the current fiscal year.

The Bank of Japan is on the far dovish side of monetary policy spectrum and in stark contrast with its major counterparts, as it still implements stimulatory policies. Despite the spike in inflation, officials don't seem willing to rethink their strategy, as we have seen various comments reaffirming their commitment to monetary support.

In today's speech in Tokyo around monetary policy, governor Kuroda did not waver, stressing the bank "will take a strong stance on continuing with monetary easing". He also dismissed the high inflation print, noting that achieving the 2% price stability target, "does not mean reaching" it, but "a situation where the inflation rate is 2 percent on average over the business cycle". [5]

USD/JPY Analysis

As the monetary policy differential between the two central bank's came once again into the spotlight, the pair returned emphatically to profits last week, with its biggest rise since late-2016. The US Dollar is now closer to setting new multi-year highs (current at 131.35,) but 133.89 still seems distant for now.

On the other hand, USD/JPY trades with caution today and comes from a three-week correction, while the Relative Strength Index points to overbought levels. This can create pressure to mid-129.00s, although a catalyst would be required for a break below the EMA200 (127.90-128.00) that would pause upward momentum.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.



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