Today there will be an important event to future recession watchers in light of the continued sharp tightening of the Fed’s policy. The US economic growth rate will be announced amid expectations of a slowdown. The USD/JPY currency pair is stable around the bullish rebound gains of 137.70, which increases expectations towards the psychological top of 140.00. The dollar/yen pair is stable around the 137.10 level at the time of writing the analysis.

Hawkish or Dovish?

Markets and investors will remain focused on Friday, when Federal Reserve Chairman Jerome Powell addresses an annual economic conference in Jackson Hole, Wyoming. This has been the place for market action rhetoric in the past, leading investors to hope that Powell will provide more clarity on a rate hike. Will it be hawkish, which is what investors call the bias towards aggressive rate increases? Or dovish, which is Wall Street’s talk of easier circumstances?

Analysts pointed to several variables that could change the Fed’s thinking ahead of its next rate policy meeting in September. They don’t think he wants to appear tough or pessimistic, maybe he wants to appear as a pigeon. They cautioned that the speech could be “nothing” with little to chew on, although the market may consider that positive given some expectations that Powell will appear hawkish.

Generally high interest rates slow down the economy in the hope of reducing inflation. But they also risk strangling the economy if they are aggressively made and drive down the prices of all kinds of investments.

Stock traders sitting still for now

Stock traders remained reluctant to make any huge bets ahead of Jerome Powell’s speech on Friday, which may provide clues to how optimistic the Federal Reserve is in the face of mounting economic challenges. These concerns did not actually go anywhere despite the controversial pivotal pacifist narrative which some have cited as one of the reasons for the short covering rebound from June lows.

Indeed, before the prestigious Jackson Hole event that Powell and global policy makers will attend, traders have had to absorb more hawkish talk. Minneapolis Fed President Neil Kashkari said late Tuesday that it was “very clear” that officials need to tighten up and get inflation under control again.

Economic reports were mixed at best, underscoring the delicate task that policy makers face in bringing down high inflation without triggering a recession. Wednesday’s data showed US pending home sales fell to the lowest level since the pandemic began. While orders from US factories for core capital goods have exceeded expectations, the picture may change in the coming months amid rising borrowing costs and uncertainty over the growth outlook.

Forecast of the dollar against the Japanese yen

• There is no change in my technical view of the performance of the USD/JPY currency pair, as the general trend is still bullish.
• I expect stability around its gains until the reaction from Jerome Powell’s statements during the Jackson Hole symposium to determine the future of raising US interest, the strength factor of the US dollar in the markets recently.
• The bulls’ destinations closest to the current performance are the resistance levels 137.85, 139.20 and 140.00, respectively.

On the downside, the support level 133.30 will be important to change the trend outlook. The currency pair will be affected today by the risk appetite of investors, as well as the reaction from the announcement of the US GDP growth rate and the number of weekly jobless claims.

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After the Federal Reserve announced the US interest rate hike, as expected, the price of the US dollar against the Japanese yen gained an upward momentum. This led to it towards the level of 137.45, but the currency pair did not enjoy gains for long, as it returned to retreat to the support level 136.40 following comments from the governor. Federal Reserve officials raised US interest rates by 75 basis points for the second month in a row, providing severe tightening in more than a generation to curb rising inflation – but they risk delivering a heavy blow to the economy.

US monetary policy makers, facing the hottest price pressures in 40 years, raised the target range for the federal funds rate on Wednesday to 2.25 percent to 2.5 percent. This brings the cumulative increase from June to July to 150 basis points – the largest rise since Paul Volcker’s anti-price era in the early 1980s.

In its statement, the FOMC said it was “strongly committed to returning inflation to its 2 percent target,” it said in a statement issued in Washington, repeating previous language that it was “extremely concerned with inflation risks.” The FOMC reiterated that it “expects that continued increases in the target range will be appropriate”, and that it will adjust policy if risks arise that may impede achieving its objectives.

US stocks remained high after the decision. Short-term Treasury yields rose, and the dollar fell.

FOMC Meeting Updates

The FOMC vote, which included two new members, Vice President for Supervision Michael Barr and Boston Fed President Susan Collins, was unanimous. Adding Barr to the board of directors earlier this month gave him a full line-up of seven governors for the first time since 2013.

Officials have been criticized for underestimating inflation and slow to respond, and they are now aggressively raising interest rates to cool the economy, even if it threatens to push it into recession. And higher prices are already having an impact on the US economy. The effects are particularly evident in the housing market, where sales have slowed.

While Federal Reserve officials assert that they can manage a so-called “soft landing” of the economy and avoid a sharp deflation, a number of analysts say the recession with rising unemployment to significantly slow price gains. The Federal Open Market Committee noted that “recent indicators of spending and production have declined,” but it also noted that job gains “have been strong in recent months, and the unemployment rate has remained low.”

The recent increase puts US interest rates close to the Fed policy makers’ estimates of neutrality – a level that neither speeds up nor slows down the economy. Forecasts in mid-June showed officials expected to raise rates to about 3.4 percent this year and 3.8 percent in 2023. Investors are now watching to see if the Fed will slow the pace of rate increases at its next meeting in September, or If strong price gains pressure the central bank to continue the large-volume hikes.

Central banks around the world are fighting a battle against rising prices. Earlier this month, the Bank of Canada raised interest rates by a full percentage point and surprised the European Central Bank with a half-point larger-than-expected move, its first increase in more than a decade.

USD/JPY Daily Forecast:

Despite the recent stability, the USD/JPY currency pair is still maintaining the bullish trend. The first reversal of the general trend will not occur according to the performance on the daily chart without the currency pair moving below the 134.40 support level. I still prefer buying USD/JPY from every bearish level. On the other hand, and over the same time period, breaking the resistance 137.85 will be important for the bulls to launch towards the awaited psychological top 140.00 at the earliest time. Today’s US dollar pairs will be affected by the announcement of the US economic growth rate.

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Before the announcement of the growth rate of the US economy, which is an important statement about the expectations of raising US interest rates, it pushed the price of the US dollar against the Japanese yen (USD/JPY) towards the 136.72 resistance level. 

This is its highest in 24 years. For four trading sessions in a row, the dollar-yen pair is recovering from recent selling operations that pushed it towards the 134.35 level and settles around the 136.38 level.

Yesterday it was announced that inflation in Japan has increased rapidly to the largest share of items in two decades, as the Bank of Japan waits for wage growth to accompany price hikes. The proportion of price-raising items in Japan’s core consumer price basket rose to 69.2% last month, the most in data going back to January 2001, according to a statement from the central bank published on Tuesday.

The outcome is unlikely to convince BoJ Governor Haruhiko Kuroda to change his relaxed stance. He has repeatedly insisted that current input-cost inflation must first become more sustainable, buoyed by wage growth and the recovery from the pandemic. However, signs of broad-based price increases are likely to continue to fuel speculation around a shift to normalization. Bond traders and hedge funds are already betting that the Bank of Japan will have to raise its 10-year yield ceiling or abandon the yield curve control framework altogether. Yesterday’s report also showed the cut-off average, another key indicator of price direction, reaching a new high, up 1.5%.

Japanese consumer prices excluding fresh food rose 2.1% from a year earlier in May, with energy costs rising due to a weaker yen, according to a government report last week.

On the other hand, before the announcement of important US economic data. US consumer confidence was reported to have fallen to its lowest level in more than a year in June as inflation continued to dampen Americans’ economic sentiments. Accordingly, Tuesday’s data showed that the Conference Board’s index of US consumer confidence fell to a reading of 98.7 from a downwardly revised reading of 103.2 in May. The median forecast in a Bloomberg survey of economists called for a dip to 100. The expectations gauge – which reflects consumers’ six-month expectations – fell to its lowest level in nearly a decade as Americans became more pessimistic about the outlook for the economy, labor market and incomes. The group’s measure of current conditions has decreased slightly.

USD/JPY Analysis Today:

The general trend of the USD/JPY currency pair is still bullish. As mentioned before, there is a clear disregard by Japanese officials, whether the government or the Central Bank of Japan is for the continued collapse of the Japanese yen. This may allow the dollar-yen pair to move towards the historical resistance level of 140.00 at any time. It is the specified level of Japanese officials that may intervene in the markets to stop more of it.

The US dollar is still the strongest with the expectations of raising US interest rates strongly during the year 2022. The Japanese economy is receiving continuous stimulus and is not completely excluded near the date of the tightening of the Japanese central policy. There will not be an initial break of the trend without moving towards the 130.00 support, otherwise the bulls will remain in control.

Will bears prevail today?

Bearish View

• Sell the EUR/USD and set a take-profit at 1.0850.
• Add a stop-loss 1.1075.
• Timeline: 1-2 days.

Bullish View

• Buy the EUR/USD and set a take-profit at 1.1090.
• Add a stop-loss at 1.0900.

The EUR/USD pair downward trend continued on Monday and Tuesday morning as the European Union considered more sanctions on Russia. The pair declined to a low of 1.0980, which was the lowest point since March 28th.

EU Economic Slowdown

The ongoing crisis in Ukraine will have a major impact on the Eurozone economy because of its vast exposure to Russia. Most countries in the European Union buy a lot of raw materials from Russia. For example, Austria imports about 80% of its natural gas from Russia. Similarly, Germany buys about 40% of its gas from the country.

Russia is also a major source of raw materials used in the manufacture of key machinery. For example, it is one of the biggest sources of important commodities like platinum and palladium that are used to manufacture catalyctic converter. These converters are used to lower emissions in automobiles. It is also a key source of steel, aluminium, coal, and wheat.

Therefore, there is a likelihood that the bloc will see more weakness in the coming months. For one, Russia has insisted that it will only sell its natural gas from “unfriendly” countries in rubles. The government has also said that it will consider putting the same conditions for other items.

As such, the EUR/USD pair has dropped because analysts expect that the bloc’s economy will underperform. This performance will then hinder the European Central Bank (ECB) from being aggressive in its rate hikes.

At the same time, analysts expect that the Fed will be more aggressive considering that the rate of American inflation has soared while the unemployment rate has dropped to 3.6%. In multiple statements, Fed officials have sounded optimistic about implementing 0.50% hike in May.

The key data to watch from the EU and US will be the latest services and composite PMI numbers. Analysts expect that these numbers will be a bit strong.

EUR/USD Forecast

The three-hour chart shows that the EUR/USD pair has formed an ascending channel that is shown in green. It is now at the lower side of this channel and moved below the 50-day volume-weighted moving average (VWMA). The Relative Strength Index has moved below the oversold level while the MACD has dropped below the oversold level.

Therefore, the pair has two likely scenarios. First, bears could prevail and push it below the lower side of the channel. Alternatively, it could rise and retest the upper side of the channel at 1.1200.

For the second day in a row, the price of the USD/JPY currency pair is moving within profit-taking operations. This noted a lot about the possibility of it happening at any time after the pair’s gains towards the resistance level 125.10 at the beginning of this week’s trading, the highest for the currency pair in seven years. The recent selling operations pushed the pair towards the 121.30 level this morning. The Japanese yen has recently fallen sharply amid the widening gap between the monetary policies of the Bank of Japan (BoJ) and the Federal Reserve (Fed), but the USD/JPY may rise further, according to Mizuho’s foreign exchange sales office, with potential implications for the GBP/JPY.

In this regard, the head of foreign exchange sales for financial institutions at Mizuho said on Tuesday that the Japanese yen is likely to fall further, and that the USD/JPY may reach the level of 130 in the coming months, a possible outcome that would raise the pound/ Japanese yen to 170 or more.

“I doubt the current uptrend is over,” said Neil Jones, Mizuho’s Head of FX Sales for Financial Institutions, in a note to clients. Looking for more yen sales in April and May. My personal sense is an orderly trend above the dollar at moderate speed with steady ranges.” He added, “The roadmap should prove 125 to 130 more liquidity than the recent price movement and limit official attention to only verbal references.”

The yen stabilized against the dollar and the British pound on Tuesday in what may be profit taking by speculative traders after overnight comments from Japanese Finance Minister Shunichi Suzuki, who said the government is watching the yen closely. This was after the yen fell to multi-year lows in the opening session of the week when the Bank of Japan said it would intervene in the Japanese government bond market with unlimited purchases in order to limit increases in government borrowing costs.

Lee Hardman, FX analyst at Japan’s MUFG, said: “While comments from Japanese officials overnight are unlikely to reverse the yen’s weakening trend on their own, they should at least help slow the recent rapid pace of yen selling that it has been evident over the past two weeks.”

Part of the Bank of Japan’s monetary policy is to keep the 10-year government borrowing cost close to 0.10% and prevent it from rising above 0.25%, although enforcement of this policy has become more difficult in recent weeks due in part to Federal Reserve monetary policy. .

The Fed raised the US federal funds rate for the first time since 2018 this month. Markets are increasingly expecting that it will likely reverse further over the remainder of the year, cuts that previously lowered the benchmark from 1.75% back in year 2020. US inflation approached eight percent in February and could rise further, necessitating a quick pivot by the Federal Reserve to reset its monetary policy settings to a less stimulating calibration of the US economy that does not increase price pressures.

According to the technical analysis of the pair: The price of the USD/JPY currency pair may continue to move in limited ranges until the announcement of the US economic growth number and the number of US non-farm payrolls from ADP later today. So far, the general trend of the dollar-yen will remain bullish as long as it is stable above the 120.00 psychological resistance, and a clear break of this trend may occur if the currency pair moves towards the 118.50 support level, according to the performance on the daily chart.

In the same current path, the resistance levels will be 122.75 and 123.60, the closest targets. We still prefer to sell the dollar yen from each ascending level.