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USD/JPY Technical Analysis: Cautious Stability Awaits

Trading in narrow ranges is what appears to be evident on the recent performance of the USD/JPY currency pair. As I mentioned before, this performance is anticipating economic data and important and influential events this week, led by US inflation numbers today, and then the US interest rate announcement. Prior to that, the price of the US dollar currency pair against the Japanese yen, USD/JPY, will settle around the 139.65 resistance level.

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It is widely expected to see the Federal Reserve’s decision on Wednesday to leave US interest rates unchanged for the first time in more than a year after policymakers suggested throughout May that they might be better off watching how the economy and inflation respond to the 5% increase that was announced. Implemented since March 2022. “The bar is likely too high for the May CPI hit/miss to change this week’s well-telegraphed policy decision,” says Alvin Tan, FX Analyst at RBC Capital Markets. “The impact (if any) will likely be felt in Powell’s tone at the Fed’s press conference, but CPI outperformance/failure could push back pricing in the decision and move hawkish/pessimistic target points in the market,” he added.

US inflation has fallen steadily since June last year, but the moderation has slowed in recent months, and the core inflation rate, which central bankers consider the most reliable reflection of domestic inflation pressures, has been stuck at 5.5% or higher since February this year. This could mean that there is a risk that inflation in the US will repeat the pattern seen in Britain and Norway where core inflation rates have risen significantly in recent readings rather than continuing to fall, which could have hardening effects on market pricing of interest rate expectations and could be as an incentive for the dollar in the future.

“It can be said that the foreign exchange market is poised for a hard stop in June,” says Stephen Gallo, global foreign exchange analyst at BMO Capital Markets. “As volatility in the forex space continues to ramp up, it will take a worrisome CPI release and a Fed rate hike in June to force a higher breakout in the US dollar,” he adds.

There is a consensus among economists that US inflation likely fell from 4.9% to 4.1% last month with core inflation, once volatile changes in energy and food prices occur. Step aside, we saw a drop from 5.5% to a new low of 5.3% barely more than a day before the Fed’s decision on Wednesday.

It is widely expected to see Wednesday’s decision to leave the US interest rate unchanged for the first time in more than a year after Fed officials suggested during May that it might now be appropriate to monitor how the economy responds to the already large 5% increase that was announced. Announced since March 2022.

“Last month’s dollar rally lost bullish momentum at the beginning of June ahead of next week’s FOMC meeting,” says Lee Hardman, senior forex analyst at MUFG. The loss of upward momentum partly reflects expectations among market participants that the Fed will stick with plans to slow the pace of hikes and leave interest rates on hold at the policy meeting. We share this view and expect the dollar to continue correcting lower this week.”

  • According to the performance on the daily chart below, the price of the USD/JPY currency pair is still in its bullish path.
  • The psychological resistance 140.00 will remain confirmation of the bulls’ control over the trend.
  • The direction of the technical indicators will not return towards strong overbought levels without the currency pair moving towards the resistance levels at 140.55 and 141.30, respectively.

On the other hand, and over the same period of time, it broke the important support level 138.50, to start controlling the bears again. This week’s events and data are important for determining the course of the currency pair in the coming days.

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