Japanese yen analysis: USD/JPY probes 140 ahead of Core PCE

USD/JPY takeaways

After this morning’s strong US data, traders are now pricing in a nearly 75% chance of another 25bps rate hike from the Fed by July.
Tomorrow’s US Core PCE report, the Fed’s preferred inflation measure, is the key fundamental data release to watch.
USD/JPY remains in a bullish short-term trend, with room to extend its rally toward 142.00 before encountering meaningful resistance.

USD/JPY fundamental analysis

Debt ceiling, schmebt ceiling.

Despite a potentially worrying lack of progress toward a US debt ceiling deal ahead of next week’s deadline (and the accompanying news that ratings agency Fitch has put the US credit rating on negative watch for a potential downgrade), the US dollar is the strongest major currency on the day.

Part of the boost comes from economic data: This morning, Q1 GDP for the US was revised to 1.3% q/q, beating expectations for a 1.1% print, and initial unemployment claims came in at just 229K, solidly below the 249K reading anticipated by economists.

With both backward-looking and coincident data showing a stronger-than-expected US economy, traders have started to seriously consider the prospect of another interest rate hike from the Federal Reserve. Once seen as a longshot, traders are now pricing in a nearly 3-in-4 chance that we could get another 25bps increase in one of the next two Fed meetings, per the CME’s FedWatch tool:

Source: CME FedWatch

Tomorrow’s Core PCE report, the Fed’s preferred measure of inflation, will be the economic data highlight for the week, with economists looking for a 0.3% m/m print that would leave the year-over-year rate steady at 4.6%. A higher-than-expected reading here would increase the market’s expectations for another Fed hike, marking a particularly sharp divergence with the BOJ’s ongoing easy monetary policy.

Japanese yen technical analysis – USD/JPY daily chart

Source: Tradingview, StoneX

Looking at the daily USD/JPY chart, rates continue to rise within a well-defined 2-week bullish channel. The pair has now eclipsed its year-to-date high near 138.00, and as of writing, rates are peeking out above the 50% Fibonacci retracement of the October-January drop near 139.60.

A clean break above that level (perhaps helped along by a hot Core PCE reading tomorrow) would leave little in the way of nearby resistance until closer to 142.00, where the 61.8% Fibonacci retracement and a minor high from November converge. Only a break back below the bullish channel and previous-resistance-turned-support at 138.00 would erase the near-term bullish bias.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.