#Currency Pair of the Week: #USDJPY (26 April 2022)
Traders will turn their attention to US inflation data, the BOJ meeting, and US Yields to look for the next direction in USD/JPY.
It seems almost all but clear that the FOMC will hike 50bps when it meets on Wednesday, May 4th. Last week, Fed Chairman Powell noted that a 50bps increase will be “on the table” and that he sees a strong case for “frontend loading” in an effort to bring inflation down to their 2% target. In addition, the most hawkish member of the Fed, St Louis Fed President Bullard, even hinted that there is a possibility of a 75bps hike! However, he noted that it was not his base case scenario. This week is the last week in April, and that means end of month data. Q1 GDP will be released and is expected to be only 1.1% vs 6.9% in Q4 2020. However, the price deflator is expected to be 7.4% vs 7.1% in Q4. In addition, the US will release the Fed’s favorite measure of inflation, Core PCE. Expectations are for a YoY reading of 5.4% vs 5.4% in February. Also, this week, the US releases Q1 earnings for some big tech companies, including MSFT, GOOG, FB, AAPL, AMZN, INTC, and TWTR, among others. The results could sway the direction of the US Dollar.
The Bank of Japan (BOJ) meets this week. At its last meeting, the BOJ left rates unchanged at -0.1% and said it would target 0% for its 10-year government bonds. At the time, USD/JPY was near 119.00. Since then, the BOJ has been in the markets numerous times defending the cap on its 10-year JGBs at 0.25% and the exchange rate has climbed to as high as 129.41. Senior government officials have been trying to “talk down” the value of USD/JPY since price was below 125, however it was to no avail. Will the BOJ release the cap of 0.25% in order to strengthen the Yen and cause USD/JPY to move lower? Its unlikely, as the BOJ is still concerned with the lingering affects of the coronavirus and the impact of the Russia/Ukraine war. The Bank of Japan will update its forecasts for growth and inflation. Look for lower growth revisions, possibly in the 2.5% area for 2022, and higher inflation revisions, possibly as high as 2%. In addition, one thing traders can be sure to expect is more talk from Kuroda as he tries to talk down the USD/JPY exchange rate.
USD/JPY has been on a tear since breaking above 116.35 on March 11th. Notice that the correlation coefficient at the bottom of the chart between USD/JPY and US 10-year Yields is +0.94. A reading of +1.00 is a perfect positive correlation, indicating that the 2 assets move together 100% of the time. A reading of +0.94 is pretty close. Also notice that the RSI is in overbought territory and moving lower, an indication that price may be ready for a pullback.
On a 240-minute timeframe, USD/JPY is consolidating in a symmetrical triangle and is currently trying to break below the bottom trendline. If price does break below, first support is at the 38.2% Fibonacci retracement level from the low of March 31st to the high on April 19th near 126.30. Below there, price can fall to the 50% retracement level from the same timeframe near 125.34, then horizontal support at 125.10. However, if price moves back inside the triangle, first resistance is at the top, downward sloping trendline of the triangle near 128.80, then the highs of April 19th at 129.40. If USD/JPY breaks above there, watch for further resistance at the psychological round number level of 130.00.
There was a lot of hawkish talk from the Fed last week, including comments from Fed Chairman Powell. However, this week the Fed goes into a blackout period in which officials are restricted from speaking. Traders will now turn their attention to the US inflation data, the BOJ meeting, and US Yields to look for the next direction in USD/JPY.
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