Temporary Halt to the Gains

Market pricing is currently suggesting a 65% chance of a final rate hike next month, while bets on a rate cut later this year are starting to recede. 

• The sudden production cut by OPEC sent oil prices higher, which is beneficial to the US dollar.
• However, in the case of the USD/JPY currency pair, it was sold to reach the support level of 132.20, after strong gains for the currency pair, which reached the resistance level of 133.75, and settled around the level of 132.30 at the time of writing the analysis.
• Oil prices rose as we entered the new week, spurred by a surprise announcement that OPEC+ would cut its production.

The cartel and its allies said the supply of crude would drop by 1.16 million barrels per day from May onwards, helping to restore some balance to a market that has been plagued by concerns about demand. When OPEC talks about production, it eventually tries to prop up oil prices by closing the supply taps, but this move also indicates that the organization expects demand conditions to weaken further.

It is clearly not a vote of confidence in the global economic outlook, although it does help create a soft ground under oil prices at the moment. Aside from oil prices, a sharp rise in energy costs has revived concerns about persistent inflationary pressures, fueling speculation that the US Federal Reserve may have one last card to play in the tightening cycle.

Market pricing is currently suggesting a 65% chance of a final rate hike next month, while bets on a rate cut later this year are starting to recede. Rising energy prices stole the thunder from some encouraging US inflation readings on Friday. A weaker measure of core US personal consumption expenditures fueled hopes that inflation is finally losing its run. The move away from OPEC dealt a heavy blow to those expectations, suggesting the battle for inflation is far from won. Rising bets for a final rate hike have given some life back to the US dollar, which has suffered collateral damage recently as investors bet the banking ring would tie the Fed’s hands.

The ISM manufacturing survey will help shape this narrative, although the main event this week will be the US Nonfarm Payrolls report on Friday.

On the other hand, affecting the performance of the currency pair. Hedge funds were once again caught off guard by the volatile Japanese yen, as the currency sank after traders turned lower to the downside. Leveraged funds cut net short yen positions by 10,574 contracts as of March 28 from last week, the most since November, only to see the currency weaken by about 2% after that. And they added bearish bets in mid-March, just as the Japanese yen rose. This has been a repeating pattern since the beginning of the year, as a large change in bearish yen bets by hedge funds was followed by an opposite move in the currency.

The Japanese yen weakened in the first quarter even amid mounting speculation that the Federal Reserve may stop raising interest rates and the Bank of Japan may raise its ceiling on 10-year yields. The currency is weighed by the country’s trade balance, which entered a deficit in mid-2021. The recent abrupt cut in oil production by OPEC+ is likely to exacerbate the shortage.

Traders were also betting that the biggest wage hike in decades won by Japanese unions amid historic inflation levels could prompt the Bank of Japan to undo massive stimulus, which would lift the yen from a three-decade low reached in October. Still others believe that the Japanese economy is not strong enough for the Bank of Japan to move toward policy normalization. The Bank of Japan’s quarterly data on Monday showed that confidence among the country’s top manufacturers has deteriorated for five consecutive quarters.

According to the performance on the daily chart below, the price of the USD/JPY currency pair is moving inside a bullish channel that lacks momentum. If this happens, the next resistance levels for performance maybe 133.80 and 135.00, respectively, and the last level is important to confirm the bulls’ control over the trend.

On the other hand, over the same period of time, breaking the support level at 130.90 will be important for the current bullish hopes to evaporate, and the bears will begin to take control, and thus think about new buying levels. The USD/JPY pair may remain in its path until the markets react to the announcement of the US job numbers.

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