USD/JPY Recovers After its Worst Week in 24 Years

  • USDJPY
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USD/JPY Analysis

Thursday's data showed that US CPI Inflation cooled to 7.7% year-over-year in October and the lowest level since the start of the year, from +8.2% in the prior month. Markets were quick to adjust their expectation around the Fed's tightening path, towards a less aggressive direction. CME's Fed Watch Tool prices in a 50 basis points hike next month and assigns the highest probability to a terminal rate of 5.00%, from 5.25% previously. [1]

The CPI report and the ensuing repricing in expectations around the Fed, sparked a USD/JPY sell-off, the intensity of which surprised me. It registered the worst week since 1998, blew past multiple support levels and closed below 140.00.

This has created risk for further decline below the lower border of the daily Ichimoku Cloud (at around 138.20-00), which would bring the 135.47-134.40 region in the spotlight. However, the collapse could prove a bear trap, as it looks excessive, from both a technical and a fundamental approach.

USD/JPY stages a rebound today after having defended the base of the Ichimoku cloud and reclaims the 140.00 handle. This could give it the chance to push for the upper border (at around 143.70), but will need daily closes above the EMA200 at mid-145s to resume its uptrend.

Markets have been trying to find peaks in inflation and the Fed's aggressive rate hike-cycle, but such hopes have not materialized so far this year. Furthermore, policy makers will have the chance to assess two more inflation reports before their next decision in mid-December. [2]

The US Central bank may have pointed to moderation of the pace, but Chair Powell has emphatically ruled out any policy pivot and hinted at higher terminal rate than previously expected. Mr Waller (voter) alluded to this, denying any softening in the bank's stance, according Reuters. [3]

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Meanwhile, the policy differential between the Fed and the Bank of Japan remains stark and unfavorable for USD/JPY. The BoJ employees negative interest rates and yield curve control in an overall uber-dovish policy setting, with no inclination to change tack. Today, governor Kuroda reiterated the bank's commitment to the monetary easing, according to Reuters. [4]

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.

References

1

Retrieved 14 Nov 2022 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

2

Retrieved 14 Nov 2022 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20221102.htm

3

Retrieved 14 Nov 2022 https://www.reuters.com/markets/us/feds-waller-may-cut-size-hikes-not-softening-fight-against-inflation-2022-11-13/

4

Retrieved 30 Nov 2022 https://www.reuters.com/markets/us/feds-waller-may-cut-size-hikes-not-softening-fight-against-inflation-2022-11-13/

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