Japanese officials, whether from the government or the Central Bank of Japan, still abandoned commenting on the Japanese yen’s collapse to its lowest level in 24 years. It brought the USD/JPY currency pair strong and continuous upward momentum. The currency pair’s gains brought it to the resistance level 136.70, the highest in 24 years, and stable around it at the time of writing the analysis. This is at a time when the US dollar pairs are awaiting the testimony of US Federal Reserve Governor Jerome Powell today and tomorrow.

Forex traders have been wondering recently: Where will the collapse of the Japanese yen continue?

In response, according to Nouriel Roubini, an additional 10% decline in the yen rate would be enough to trigger a change in BOJ policy. CEO Roubini Macro Associates told Bloomberg Television at the Qatar Economic Forum on Tuesday that the yen will continue to fall thanks to the discrepancy in the political stance between the dovish Bank of Japan and the hawkish Federal Reserve. He said that this would lead to an inflation problem for the Bank of Japan and would lead the BoJ to abandon the zero rate policy and yield curve control program.

Roubini is known for his insight regarding the 2008 financial crisis.

Roubini added: “If the dollar-yen rate crosses the 140 mark, the Bank of Japan will have to change its policy and the first change in policy will be to control the yield curve.” “So I think another 10% drop in the Japanese yen would mean a change in policy.”

The Japanese yen has fallen about 15% this year.

Stuck between the Bank of Japan keeping interest rates on the ground to boost the domestic economy and the US Federal Reserve aggressively to rein in high inflation, the yen fell to a 24-year low against the dollar. Speculators have upped their bets on the possibility that the Bank of Japan will eventually have to change course for its ultra-easy monetary policy, something that doubled down on its meeting last week.

Roubini added that while some in the market were speculating about official intervention to stem the currency’s decline, exacerbating price hikes for consumers and businesses, such an action would be a waste without changing central bank policy. “If you have intervention in the forex market without a change in monetary policy by the Bank of Japan, the intervention will not be enough to stop the yen’s decline,” he added.

USD/JPY Technical Outlook:

The general trend of the USD/JPY currency pair is still bullish. As I mentioned before, forex investors do not care about the arrival of technical indicators towards overbought levels after the recent gains. The continuation of the above-mentioned factors ensures that the bulls continue to control the performance. The closest targets to the current trend are the resistance levels 137.65 and 138.80, then the psychological resistance 140.00, respectively. On the other hand, according to the performance on the daily chart below, the first breakout of the trend will be the breach of the 130.00 psychological support. The reaction from Jerome Powell’s testimony today will have the strongest impact on the performance of the currency pair.

The strong and continuous signals for the future of raising US interest rates throughout 2022 contributed to the continuation of the bullish momentum of the USD/JPY currency pair towards its highest in 20 years. It tested the 134.73 resistance at the beginning of this important week’s trading, and its gains were reaching the resistance level 134.55. Forex investors do not care about technical indicators reaching overbought levels, as Japan has not defended the collapse of its currency in the recent period.

The Japanese central bank is completely abandoning any sign of tightening its policy as other global central banks are doing. The US Federal Reserve had pledged in May to raise the federal funds rate by 50 basis points at each of its next meetings in June and July, although the risk on Friday was tilted in the direction of the bank continuing to raise borrowing costs through it significantly.

Overall, US Federal Reserve Governor Jerome Powell could provide a hawkish surprise on Wednesday even after effectively pre-announcing a 50 basis point increase in US interest rates at this week’s Federal Reserve meeting and in July. Sharp US inflation data for May reinforced expectations that the Fed will continue to raise borrowing costs at this pace until September, with some investors betting that the Fed chair will provide a significant 75 basis point move unless price pressures subside. Powell could bolster that speculation during his post-meeting press conference by refusing to take 75 basis points off the table — as he did openly last month by saying such a move was not actively considered — or by emphasizing the need for smart policy to cool price hikes.

Friday’s data sent a message that the US central bank has a lot of work to do to contain price pressures. Consumer prices excluding food and energy rose 8.6% in the 12 months through May, accelerating to a 40-year high. After the data was released, investors saw the odds of the Federal Reserve raising interest rates by three-quarters of a percentage point in July, while economists at Barclays plc changed their rate call to expect such a hike as soon as this week.

The updated quarterly forecasts from the US central bank are also likely to increase the projected path of future hikes and eventual peaks. Officials in March saw rates hit 1.9% this year and peaked at 2.8%, according to median estimates. A Bloomberg survey of economists – conducted before consumer price data for May was released – showed expectations advancing to 2.6% this year and 3.1% in 2023.

The Fed will be the highlight of a big week for global central banks. The next day, the BoE is also likely to raise interest rates and is likely to discuss a half-point move, and on Friday the BoJ will make its own decision at a time when the weak yen is proving increasingly difficult to prepare.

According to the technical analysis of the pair: There is no change in my technical view of the price performance of the USD/JPY currency pair, as the general trend is still bullish, and it may maintain its gains around the highest in 20 years until the US Central Bank announced on Wednesday the closest targets for the bulls. According to the current performance, the resistance levels are 134.85, 135.20 and 136.00, respectively.

On the other hand, according to the performance on the daily chart, it will be important to break the support level 130.65 to start the bears’ control.

The sharp upward trajectory of the performance of the USD/JPY currency pair reached the 131.25 resistance level, the highest in 20 years. At the end of last week’s trading, the currency pair fell to the level of 129.31 after announcing the unexpected contraction of the US economy in the first quarter. This led to the decline of the US dollar against the rest of the other major currencies, but any weakness is still seen as temporary, as economists say that the economy must return to healthy growth.

All US dollar pairs and markets are on an important date this week, as the US Federal Reserve will announce an increase in US interest rates for the first time since 2018.

The dollar pared fresh multi-month highs against sterling and multi-year highs against euro and yen on news that the US economy contracted 1.4% qoq in the first quarter. The market had expected the economy to grow by 1.1% on a quarterly basis. Commenting on this, Joe Manimbo, chief analyst at Western Union Business Solutions says, “The US dollar gave up some of its strength after the worrying news of growth in the first quarter.”

The dollar index is a broad measure of the currency according to a basket of US dollar exchange rates – has been steady below multi-year highs of 103.80 in the wake of the numbers. Meanwhile, strong GBP/USD selling was halted near 1.2436, with EUR/USD flat at 1.04. “The sudden contraction in growth has the dollar ready for some profit taking after its amazing strength exploded this week,” the analyst adds. Earlier, “the dollar made its way to highs as it remained the preferred currency in the face of mounting concerns about global growth.”

Certainly, it is too early to end the dollar’s rally and the Forex markets will remain on the alert for further gains.

Looking at the details of the GDP release, there is no major cause for concern regarding the outlook. In fact, final domestic demand was still growing well at 2.6% and consumer spending increased by 2.7% during the quarter. “Where the economy faltered was producing goods,” says economist Avery Shenfield of CIBC Capital Markets. “This has accelerated business investment spending, which is a sign of confidence about future demand that matches the desire to add workers,” he explains.

He notes that the increase in imports has been a drag on GDP as companies replenish stocks, buoyed by improvements in global supply chains during the quarter.

The drop in GDP is not as bad as it seems, says Daniel Vernazza, chief international economist at UniCredit in London. This is because the biggest factors detracting from GDP in Q1 22, net exports and inventories, are also the most volatile components and are likely to improve in the coming quarters.

He notes that with rising inflation, consumers seem to finance consumption by indulging in the savings accumulated during the pandemic. But “at some point, Americans are going to start cutting back on demand unless prices start dropping again.” However, CIBC capital markets expect a return to healthy growth over the next two quarters, as net trade and inventories are unlikely to be equally negative, and crucial to the dollar’s outlook, the Fed is unlikely to be affected by a GDP disappointment.

Inflation is rising rapidly, and they will look at the data and choose to raise interest rates by 50 basis points in the upcoming meetings.

This would provide the dollar’s exchange rates with an ongoing yield boost.

According to the technical analysis of the currency pair: In the near term and according to the performance of the hourly chart, it appears that the USD/JPY currency pair is trading within the formation of a descending channel. This indicates a strong short-term bearish momentum in the market sentiment. Therefore, the bears will look to extend the current series of declines towards 129.38 or lower to 128.88. On the other hand, the bulls will target channel breakout profits at around 130.36 or higher at 130.91.

In the long term, and according to the performance on the daily time frame, it appears that the USD/JPY is trading within the formation of a sharp ascending channel. This indicates a strong long-term bullish momentum in the market sentiment. Therefore, the bulls are looking to extend the current gains towards the 131.30 resistance or above to the 133.30 resistance. On the other hand, the bears will be looking for potential reversals at around 128.43 or lower at 126.51.

 

We continue to see plenty of selling opportunities every time we bounce, so I am focusing on short-term charts more than anything else.

The Euro initially tried to rally during the trading session on Monday but gave back gains to show signs of exhaustion again. At this point, the market breaks down below the hammer from a couple of days ago could open up more selling pressure, perhaps down to the 1.06 level.

Keep in mind that the Euro continues to suffer at the hands of significant pressure, but beyond that, there are a lot of negative influences on the Euro, due to the fact that the risk appetite in the European Union is difficult, to say the least, with the war in Ukraine causing a lot of headaches. Beyond that, you have to worry about whether or not the Russians are going to supply gas to the European Union, or if they have to pay exorbitant and ridiculous prices by importing LNG from the United States.

If we bounce from here, then it is likely that we will see plenty of selling pressure near the 1.0933 level where it has been a bit resistant previously. However, if we were to break above there then I think the market goes looking to reach the 1.10 level, and then perhaps the 50 Day EMA which sits just 40 pips above there. We have been in a downtrend for quite some time, so any rally at this point in time will more than likely find sellers willing to jump in and take advantage of “cheap dollars.”

The Federal Reserve continues to be very hawkish when it comes to the outlook for interest rates, then it is very likely that the US dollar will continue to beat up on the Euro, which is not going to see higher interest rates, lease not intentionally from the central bank as they have to worry about not only inflation but also a serious lack of growth. A lack of energy on the continent could cause major issues as well, I think you are starting to see part of that being weighed by the markets, and of course the possibility of a serious lack of economic growth as a result. In general, I think we continue to see plenty of selling opportunities every time we bounce, so I am focusing on short-term charts more than anything else. At this juncture, I do not have any interest in buying the Euro.

Since the start of this week’s trading, the price of the USD/JPY currency pair has been moving in the same path as the closing of last week’s trading. This is during an upward momentum that succeeded in moving towards the resistance level 123.68. It restores expectations of the psychological top 125.00 momentum to move to it as soon as possible. The recent gains of the US dollar in the forex trading market will be important today, as the contents of the minutes of the last meeting of the US Federal Reserve will be announced.

Expectations so far are still strong for the future of the Fed’s tightening policy, and we do not expect anything new to be presented in the minutes except to confirm that.

After reporting a slowdown in the pace of growth in US service sector activity over the past few months, the Institute for Supply Management released a report showing that growth in the sector accelerated in March. The ISM said that its services PMI rose to a reading of 58.3 in March from a reading of 56.5 in February, and any reading above the 50 level indicates growth in the sector. Economists had expected the index to rebound to a reading of 58.0.

The slightly larger-than-expected increase in the services PMI came after three consecutive monthly declines after the index hit a record high in November. The recovery of the main index came with the rise of the new orders index to a reading of 60.1 in March from a reading of 56.1 in February. The business activity index also rose to 55.5 from 55.1. The report showed that the employment index also rebounded to a reading of 54.0 in March from a reading of 48.5 in February, indicating job growth in the service sector after the contraction in the previous month. The inventories index also rose to a reading of 51.7 in March from a reading of 50.8 in February, while the supplier delivery index fell to 63.4 from 66.2. On the inflation front, the price index rose to 83.8 in March from 83.1 in February, reaching its second highest reading ever after 83.9 in December.

Last Friday, the ISM released a separate statement showing that US manufacturing activity unexpectedly grew at a slightly slower rate in March. The manufacturing PMI fell to a reading of 57.1 in March from a reading of 58.6 in February, while economists had expected the index to rise to 59.0.

According to the technical analysis of the pair: The general trend of the USD/JPY currency pair is still bullish, and its recent gains pushed the technical indicators towards strong overbought levels. Investors may ignore this if the momentum of the US dollar continues to achieve more gains and that this event will be top of the line. 125.00 is the importance of bulls dominating the highest target for the pair in six years. Unless the dollar gains momentum, the dollar-yen currency pair may be exposed to a profit-taking sale at any time.

There will be no reversal of the dollar-yen trend without moving towards the 120.00 support – the previous psychological top – the pair may remain in a limited range until the reaction from the announcement of the minutes of the last meeting of the US Federal Reserve.