USD/JPY analysis: US dollar rally not over yet

• USD/JPY analysis: Rising US import costs is inflationary – bad news for lower yielding currencies like JPY
• Retail sales missed but dollar bulls will not be too concerned
• USD/JPY technical analysis point to a major breakout

USD/JPY analysis video and insights on EUR/USD and gold

USD/JPY analysis: US dollar weakens as retail sales drop

The US dollar was already lower on the session and then fell further in response to the mixed data releases from the US, with retail sales looking particular weak. But I reckon it is far too early to talk about the top for the dollar, and a recovery for the greenback is likely given the long-term bullish trend and recent strong data releases from other sectors of the economy, plus a hawkish Federal Reserve. The soft retail sales figures could be an outlier after beating expectations in each of the previous six months. What’s more, import costs posted its largest gain in nearly two years in January, which could stop the disinflation process. The Fed won’t like that, and after a hot inflation report, they will be even more cautious. So, I reckon that the USD/JPY could rise back above 150.00 and break its two-year resistance just below the 152.00 handle, as a result.

The dollar’s slight weakness over the past couple of days has coincided with market pricing of rate cuts in 2024 rising back to around 100 basis points after falling to 90 bps following the hot CPI data. But with talks of an early rate cut in March effectively over and lots of questions marks over a May rate cut, this should help keep the dollar supported on the dips.

USD/JPY analysis: Rising import costs is inflationary

Signs of sticky inflation are everywhere. Rising costs of petroleum were among the reasons behind the sharp 0.8% monthly rise in import costs last month. This was the biggest rise since March 2022, although a revised 0.7% decline in the previous month from zero means the data is perhaps less alarming that the headline suggests. Still, the rise was not insignificant buy was unexpected. This comes hot on the heels of the CPI data showing price pressures came down less than expected last month. With inflationary pressures on the rise, yields could remain supported for longer, undermining lower yielding currencies like the yen and franc.

Today’s publication of jobless claims also beat, as too did the manufacturing indices of Philly and NY. But softer industrial production and retail sales meant the dollar would head lower, a move which, as I mentioned, is unlikely to be sustained. Headline retail sales fell 0.8% while core sales declined by 0.6%, both missing expectations. Industrial output declined 0.1% m/m.

Looking ahead, on Friday, we will have PPI, building permits, and UoM Consumer Sentiment.

USD/JPY technical analysis

From a technical point of view, the USD/JPY is at a major pivotal area here.

The USD/JPY has faced challenges in maintaining a breakout above the 150.00 handle over the past few years, as evident from the weekly chart provided. However, a cup-and-handle continuation pattern suggests a potential breakout in the future.

In the immediate term, it's crucial for support to hold within the 150.00 to 149.50 range. This range, particularly the lower end, served as the starting point for this week's breakout, as depicted in the daily chart. The big thrust candle on Tuesday implies the possibility of further gains, but a prompt recovery is essential to prevent a loss of momentum.

Tuesday’s low at 149.21 is the line in the sand for me as far as the short-term is concerned. A breach of this level could trigger a rapid sell-off as resting stops below are activated.

However, if my base case scenario unfolds and we witness additional gains, my initial focus would be on reclaiming Wednesday's low at 150.35. Subsequently, the bulls’ attention may shift to liquidity above this week's high at 150.89, potentially paving the way for a surge towards the double top high around the 181.90-181.95 area, where the USD/JPY reached its peak in the past two years.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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