USD/JPY Heads towards 3rd Losing Week as Market Await US Inflation Update


USD/JPY Analysis

The US Federal Reserve is far ahead than its major counterparts in the monetary tightening path and especially the Bank of Japan, which still implements ultra-loose policies. The US central bank has already hiked rates two times in order to combat inflation and expects to move with more 50 basis points in the next couple of meetings.

Wednesday's minutes from this month's meeting reaffirmed its hawkishness and its commitment to fighting inflation, but they did not add anything new to the public discourse. If anything, the Fed has appeared a bit conservative, as Chair Powell had ruled out larger 75 basis point increases, saying that this is "not something the Committee is actively considering".[1]

Although Mr Powell has tried to reassert the bank's hawkishness recently, officials have to deal with the prospects of a recession, as yesterday's second GDP reading showed that the economy contracted by 1.5% in Q1 (annualized). Furthermore, inflation remains elevated but has shown moderation, taking some of the edge off.

On the other hand, core CPI inflation in Japan surged beyond the BoJ's 2% target in April, as last week's data showed. This may put pressure on the Japanese central bank to begin moving away from it uber-dovish stance.

So far however, we have not really seen such intentions or any second-guessing of this strategy. As per Reuters' reporting, BoJ governor Kuroda said that that prices likely would not rise sustainably and stably. [2]

USD/JPY had hit twenty-year highs early in May, but has since declined and heads towards its third straight negative week and a losing month. It has registered two daily closes below the EMA200 (black line) and one below the 23.6% Fibonacci from this year's lows to the highs.

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This creates risk for a deeper correction towards the 38.6% level (124.51), but it may be early to talk about a breach of this area, while the daily Ichimoku cloud could provide support.

Despite being on the defensive and capped by key technical levels, the greenback holds close to those and shows some resilience. The correction is rather shallow for now and the broader bias is still positive.

As such, USD/JPY could find the chance to reclaim 128.00, but bulls will likely need a catalyst to revive their ascending aspirations.

From today's economic calendar, US PCE inflation stands out, a release that could determine the pair's next move.

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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