Since the start of trading this week, the bulls have been trying to control the performance of the USD/JPY currency pair. The rebound gains stopped at the 134.68 resistance level, until the markets and investors interacted with the announcement of the minutes of the last meeting of the US Federal Reserve. It will give a clearer picture of the future of raising US interest rates.

Economic Outlook

A report from the Federal Reserve showed that US industrial production increased more than expected in July. The Federal Reserve said industrial production rose 0.6 percent in July after an unchanged revised reading in June. Economists had expected industrial production to rise 0.3 percent, compared to a 0.2 percent decline originally reported from the previous month.

The larger-than-expected increase in industrial production came with industrial production advancing 0.7 percent in July after declining 0.4 percent for two consecutive months. Mining production also rose 0.7 percent in July after jumping 2.0 percent in June, while utility production fell 0.8 percent after declining 0.3 percent. The report also showed that capacity utilization in the industrial sector rose to 80.3 percent in July from a revised 79.9 percent in June. Economists had expected capacity utilization to come to 80.1 percent from originally 80.0 percent from the previous month.

US Housing Market

New residential construction in the United States fell much more than expected in July, according to a report from the Commerce Department. The report showed that homes started fell 9.6 percent to an annual rate of 1.446 million in July after falling 2.4 percent to an average of 1.559 million in June. Economists had expected housing starts to fall 1.2 percent to a rate of 1.540 million.

With the decline sharper than expected, new homes reached their lowest annual rate since they reached 1.430 million in February of 2021. The Commerce Department said single-family homes fell 10.1% to 916,000, while multi-family starts fell 8.6%. to 530,000. Building permits, an indicator of future housing demand, also fell 1.3 percent to an annual rate of 1.674 million after rising 0.1 percent to a revised rate of 1.696 million in June.

Economists had expected building permits to decline 2.1% to an annual rate of 1.650 million from 1.685 million originally reported for the previous month. Single-family permits fell 4.3 percent to 928,000, which more than offsets a 2.8 percent jump in multi-family permits to 746,000.

USD/JPY Technical Outlook:

The recent gains in the USD/JPY currency pair moved the direction of the technical indicators to the upside. If the US retail numbers come today and the content of the minutes of the last meeting of the US Federal Reserve is in favor of the bank’s tightening path, the bulls may have the momentum of more launch to higher and closer levels.

• The resistance for the currency pair is currently 135.60, 136.30 and 137.40, respectively, and the last level is pushing the technical indicators towards overbought levels.
• The pair’s current direction may change if it moves towards the support levels 132.50 and 131.00, respectively.
• We prefer buying the pair from every bearish level.

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For four trading sessions in a row, the bulls failed to push the USD/JPY currency pair to more than the 135.58 resistance level. The US dollar pairs await the announcement of US inflation figures, which have a strong reaction to the future expectations of raising US interest rates in the remainder of the year 2022. The dollar-yen pair is stabilizing around the 135.10 level at the time of writing the analysis.

The US Labor Department will release its July consumer price report on Wednesday, followed by its producer price report on Thursday. Investors and economists will be looking for any signs that sharp US interest rate increases by the Federal Reserve in the past few months have helped to control inflation.

For its part, the Federal Reserve has raised US interest rates four times this year in an attempt to rein in the economy and cool the hottest inflation in four decades. Wall Street markets are concerned that the central bank could slam the brakes too hard and push the economy into recession. Last week’s strong US jobs report had most economists expect the Federal Reserve to raise short-term interest rates again by another three-quarters of a point at its September meeting.

USD/JPY Economic Outlook

Most economic data is already pointing to a slowdown. The US economy has now contracted for two consecutive quarters, which is an unofficial indicator of recession. But recession fears were eased by a hot jobs market as US unemployment fell to its historic lows. While this is good for the economy, it is a sign of persistent inflation.

What else is currently affecting the markets?

The fighting in Ukraine and the attacks on Europe’s largest nuclear plant are other factors hanging over the markets. Moscow and Kiev have accused each other of bombing a nuclear power plant in the Russian-occupied southeast of Ukraine, attacks that have raised international concern. The Zaporizhzhia Nuclear Power Plant has six nuclear reactors, and the fighting around them has increased the risk of a nuclear accident.

Forecast of the US dollar against the yen:

• The performance of the USD/JPY currency pair may remain stable around its recent gains until the US inflation figures are announced.
• This completes the picture for the US economy and the path of raising US interest rates.
• Currently, the nearest resistance levels for the dollar pair are 135.85, 136.20 and 137.00, respectively.
• A break of the support level 132.25 will be important for the bears to dominate.
• The general trend of the dollar-yen is still bullish.

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The Japanese yen fell to its lowest level against the dollar in 24 years as the growing gap between the monetary policy of the US Federal Reserve and the Bank of Japan attracts money towards the US. The USD/JPY currency pair recently reached the resistance level of 135.50 and the currency pair crossed the 135.19 level for the first time since 1998. Given the recent volatility, these extreme moves are only expected to continue, as the yen tests the thresholds key such as level 140 which could lead to the intervention of Bank of Japan Governor Haruhiko Kuroda.

The Japanese yen’s implied volatility has reached its highest levels since the outbreak of the pandemic amid uncertainty over global growth and the central bank’s aggressive policy to control the yield curve. With the spread between US and Japanese two-year government bonds at its widest since 2007, conditions are ripe for the US currency to maintain its upward trajectory. If the Fed raises 75 basis points on Wednesday as expected, it is likely to further strengthen the dollar.

US producer prices rose 10.8% in May from a year earlier, underscoring the continuing threat to the US economy from inflation that shows no sign of slowing. Yesterday’s report from the US Labor Department showed that the Producer Price Index which measures inflation before it reaches consumers, rose at a slightly slower pace last month than it did in April, when it jumped 10.9% from a year earlier, down from 11.5% annually. March gains.

On a monthly basis, producer prices rose 0.8% in May from April, higher than the previous month, when they rose 0.4%. Energy prices, led by gas, rose only 5% in May from April. The other big driver of price gains last month was the sharp 2.9% increase in the cost of trucking goods, a sign that supply chain problems are not yet fully resolved. Food costs have not changed.

The numbers suggest that price hikes will continue to erode Americans’ salaries and wreak havoc on household budgets in the coming months. Inflation has caused major political problems for US President Joe Biden and Democrats in Congress and forced the Federal Reserve into a series of rapid interest rate increases aimed at slowing the economy and dampening rate increases.

Last Friday, the government reported that inflation according to the US Consumer Price Index jumped to a new 40-year high of 8.6% in May, a surprise gain that disappointed expectations that price increases may slow. Gas and food costs rose sharply, spurred on by Russia’s invasion of Ukraine, but costs for rent, new and used cars, medical care and clothing also rose, evidence that inflation is spreading more widely across the economy.

The Fed is expected to raise the short-term interest rate by three-quarters of a point today, the largest increase since 1994, as it ramps up efforts to rein in high rates.

According to the technical analysis of the pair: the recent indications that there will be no intervention to stop the collapse of the yen until it reaches a price of 140 against the dollar. This allows the bulls to hold on to their record gains, which pushed the technical indicators on the USD/JPY chart towards strong overbought levels. If the decisions of the US Federal Reserve come in support of a strong path to raise the US interest rate, the bulls may head in the currency pair towards the resistance levels 136.30 and 137.75 before the specified top of the intervention.

On the other hand, if the US Central Bank’s announcement today is less hawkish, the dollar-yen currency pair may be exposed to profit-taking operations. There will not be a break in the general trend without moving below the 130.00 level.

The EUR/USD exchange rate entered this important new week’s trading near five-year lows after the terrible month of April. It may attempt a corrective recovery in the coming days if the Fed halts quantitative tightening on the way into the summer months. Waiting for that decisive moment, the price of the euro dollar is settling around narrow ranges for several days. It is stable around the level of 1.0520 at the time of writing the analysis, after sharp losses recently, down to the support level 1.0470. Domestic and international factors have strongly affected the price of the euro against the dollar.

Commenting on the performance, Zach Bandel, analyst at Goldman Sachs said, “Potential explanations for the euro’s worse-than-expected performance include continued outflows of equities out of the region, broader sovereign spreads, and renewed investor focus on potential energy price disruptions from the war in Ukraine.” He added, “It is recognized that there are many factors that skew EUR/USD near-term risks to the downside – including the conflict between Russia and Ukraine, but also the risks of faster US interest rate hikes and pressure on stocks. global, as well as virus-related disruptions.”

Goldman Sachs also says that the single European currency could continue to struggle as long as the above risks overshadow the outlook for the Eurozone while the Bank’s recently downgraded forecast indicates that it could take up to six months for the euro to return to its March level of 1.10. From the current depth 1.05. And while the euro will have a long way to go to reverse the -7.4% loss it has incurred so far in 2022, it may enjoy some relief later this week if the Fed’s decision on Wednesday has the effect of fending off the recent relentless rally in the states.

US yields will likely be choked as the gap between them and their European peers improves if the Fed today delays the widely expected start of its quantitative tightening (QT) process, which aims to reduce nearly $9 trillion in government bond and mortgage holdings. The Fed confirmed in March that this process could begin as soon as May, but US Federal Reserve Governor Jerome Powell also said, “We will take into account the broader financial and economic contexts when we make a decision on timing.”

According to the technical analysis of the pair: There is no change in my technical view of the performance of the EUR/USD currency pair. The general trend is still bearish and the current stability around the 1.0500 support may not be the end as long as the weakness factors of the currency pair exist. The continuation of the Russian-Ukrainian war and its repercussions, in addition to the European Central Bank’s abandonment of the passage of raising interest rates, as do the rest of the global central banks led by the Federal Reserve. Factors will continue to push the euro to lower levels, and the closest to it is currently 1.0455 and 1.0300, respectively.

On the other hand, according to the performance on the daily chart, breaking the resistance levels 1.0790 and 1.1000 will be important in causing a change in the current outlook. Today, all focus of the currency pair will be on the US Federal Reserve’s announcement of its monetary policy decisions.