USD/JPY Subdued at Key Tech Levels Ahead of US CPI Inflation

  • USDJPY
    (${instrument.percentChange}%)
  • USDOLLAR
    (${instrument.percentChange}%)

USD/JPY Analysis

The pair is running an amazing rally this year, having gained around 29% as of the end of October, largely fueled by the extreme policy divergence between the central banks of the US and Japan.

In order to combat surging inflation, the Fed has delivered 375 basis points worth of rate hikes since the March lift-off, running its most aggressive cycle in at least three decades. Last week it hinted to a moderation of the pace, but stayed on its hawkish path, as Chair Powell ruled out any pause and talked of a likely higher terminal rate compared to the one projected in September. [1]

The Bank of Japan however, is in stark contrast with the Fed and most of its major counterparts. It implements an ultra-loose policy with negative interest rates and yield curve control and has shown no inclination to change stance, despite the fact that inflation has been running above its target for quite a while now.

Governor Kuroda noted today that it is premature to lay out any exit plan from these policies and stressed the need for their continuation, according to Reuters. [1]

This year's USD/JPY rally culminated to October's 32-year highs, which based on the price action, likely triggered another intervention by Japanese authorities, but there has been no official confirmation. The pair has been under pressure since then, currently running its fourth straight losing week.

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This has brought the pair below the 23.6% Fibonacci of the August Low-October multiyear high advance and has led to a breach of the EMA200. As such, there is scope for further correction towards the 38.2% Fibonacci.

However, the 144.00-143.30 region is a strong cluster of support, since it also includes the ascending trend-line and the daily Ichimoku Cloud. Closes below this region could open the door for a larger drop towards 140.34-00, but this has a high level of difficulty.

Despite recent deflation, the USDOLLAR has not lost control and above the 38.2% Fibonacci, this is viewed as limited correction that leaves room for renewed gains, while the monetary policy differential remains supportive. As such, i can see another push towards 150.00 and eventually new multi-decade highs above 152.00, although it may be premature to talk about that.

Markets now turn to today's US CPI Inflation update, which the Fed will take into account for its next policy decision and which can determine the next leg of the USD/JPY 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.

References

1

Retrieved 10 Nov 2022 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20221102.htm

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