For three trading sessions in a row, the bulls are settling in the price of the USD/JPY currency pair around the resistance level at 125.75, the highest in six years. Despite the announcement of strong US inflation numbers that support the policy of the US Federal Reserve, the price of the currency pair remained stable in its last range. This may give an image to the markets that the currency pair has reached its recent gains on technical indicators towards overbought levels. Overall, there was a noticeable reaction in the forex foreign exchange market to the release of US inflation data which showed prices rose sharply in March, keeping expectations alive for a series of large US interest rate increases. However, the market reaction indicates that the inflation data was not quite as hot as expected and the dollar was sold off as a result.

Core inflation in the US rose 0.3% on a monthly basis in March, down from the 0.5% recorded in February which is disappointing versus the 0.5% that the market was looking for. The annual core CPI grew 6.5%, up from 6.4% in February, but less than the 6.6% market forecast.

Core CPI inflation grew 8.5% in March, beating expectations of 8.4% and the previous month’s 7.9%. The reaction of the forex market indicates that investors have certainly focused more on the core inflation component, given that the headline figure is heavily influenced by global energy prices.

The Federal Reserve is expected to respond to rising inflation by raising US interest rates by up to 220 basis points in 2022, with two consecutive increases of 50 basis points expected in the next two meetings alone. If inflation begins to slow faster than expected, those expectations may be mild.

As a result, the dollar’s rally may also be moderate.

“Unless the oil price rises sharply again, this could be the peak,” says Christoph Bales, an economist at Commerzbank. “Even in this case, however, inflation is not expected to fall quickly. So the Fed remains under pressure.”

Key inflation data shows that the majority of price pressures facing Americans are rooted in global factors related to rising oil and commodity prices. Used car prices have fallen by 3.8%, as one of the main drivers of inflation in 2021 is now beginning to provide a physical drag. Prices of goods outside of energy and food fell 0.4%. Analysts are of the view that whether the inflation rate has peaked in March depends above all on the further development of oil and gasoline prices. If the oil price remains at the current level of around $100 per barrel of Brent and does not rise again, then March will probably be the highest in the inflation rate.

If inflation begins to decline, expect the US Federal Reserve’s hike expectations to come in handy. From a currency market perspective, this could mean that the dollar is approaching its peak.

According to the technical analysis of the pair: I still warn that the recent gains of the US dollar against the Japanese yen pushed the technical indicators towards overbought levels. With the impetus for raising US interest rates to stop, the currency pair may be exposed to strong profit-taking operations. The closest goals for the bulls are currently 125.75, 126.20 and 127.00, respectively. On the other hand, according to the performance on the daily chart, a trend reversal will not occur without breaching the 120.00 support – the psychological top previously – and so far, the divergence in economic performance and the future of tightening global central bank’s policy will remain in favor of the strength of the upward trend.

The price of the US dollar continued to rise against the rest of the other major currencies. This came aftr the minutes of the last meeting of the Federal Reserve revealed that the US central bank plans to reduce the balance sheet and may be more aggressive about US interest rates. This caused general losses, prompting investors to buy the US currency aggressively. In the case of the USD/JPY currency pair, it moved towards the resistance level 124.05, near its highest level in six years, before settling around the 123.70 level at the time of writing the analysis.

The Federal Reserve released the minutes of the Federal Open Market Committee (FOMC) meeting last month that highlighted interim efforts to shrink the over $9 trillion balance sheet by $95 billion per month. This includes $60 billion a month in Treasurys and another $35 billion in mortgage-backed securities.

Panelists also acknowledged that they need to be bolder about rates, especially if inflation remains high or rising. “Many participants noted that — with inflation well above the committee’s target, inflation risks to the upside, and the fed funds rate well below participants’ estimates of its long-term level — they would have preferred a 50 basis point increase in the target range for the interest rate over the Federal funds at this meeting.”

And based on comments from several Fed officials this week, including Governor Lyle Brainard and Philadelphia Fed President Patrick Harker, the central bank is likely to agree to a 50 basis point rate hike during the two-day FOMC meeting. .

On the economic data front, US mortgage applications fell 6.3% in the week ending April 1, according to the Mortgage Bankers Association (MBA). The 30-year mortgage rate rose to 4.9%. Earlier this week, the Services Purchasing Managers’ Index (ISM) rose to a reading of 58.3 in March, below market estimates of 58.4. Non-manufacturing business activity rose to 55.5, employment jumped to 54, prices rose to 83.8, and new orders rose to 60.1.

The US Treasury market was mixed in mid-week trading, with the benchmark 10-year yield rising to 2.603%. Yields on one-year notes rose to 1.756%, while yields on 30-year notes jumped to 2.626%. Also, the US Dollar Index (DXY), which measures the performance of the US currency against a basket of major currencies, rose to 99.62, from an opening at 99.47, and overall, the US Dollar Index DXY rose by about 2% this week, raising its year-to-date rise to 3.8% .

So far, the general trend of the USD/JPY currency pair is still bullish, and the current stability is despite the confirmation of the bulls’ control of the trend. But it also indicates the arrival of technical indicators towards strong overbought levels, and with investors absorbing the factors of the US dollar’s ​​gains, the pair may be exposed to profit-taking at any time. Currently, the closest targets for the bulls are 124.20 and 125.00, respectively. The first reversal of the trend will not happen without breaching the 120.00 support as a first stage. I still prefer selling the USD/JPY from every bullish level.

Today, the currency pair will be affected by the reaction from the Federal Reserve, the extent of risk appetite, as well as the weekly jobless claims announcement.