USD/JPY analysis: Gearing up for a breakout?

• USD/JPY analysis: Watch out for Japanese intervention, Tokyo CPI and US core PCE inflation data
• Dollar rebounds after a weaker start
• USD/JPY technical analysis point to a bullish breakout

The USD/JPY was trading flat at the time of writing, but the US dollar turned positive against several other currencies after a weaker start, despite the release of some weaker than expected economic data from the world’s largest economy. We saw the Richmond Manufacturing Index print -11 compared to -5 expected while the CB Consumer Confidence index came in at 104.7 compared to 106.9 expected. On Monday new home sales also came in weaker as well. Nevertheless, the USD/JPY remained flat and was holding near the previous year’s high just below the 152 handle. It looks like the USD/JPY is gearing up for a potential breakout to the upside despite repeated verbal intervention from Japanese officials.

USD/JPY analysis: What to watch out for this week?

Apart from actual intervention in the FX markets by Japanese government or the Bank of Japan, we also have several Fed speakers this week, as well as key data from both the US and Japan.

The main focus will be on Friday's US core PCE, the Federal Reserve's preferred gauge for inflation. The market will want to see that inflation is cooling to support the view that the Fed will be cutting interest rates potentially as soon as June. The Fed held interest rates unchanged for the fifth successive meeting last week, reaffirming its position of awaiting stronger confidence in inflation before contemplating rate cuts.

Yet, the dollar rallied after a brief drop, boosted by dovish central bank meetings elsewhere, including a cut by the Swiss National Bank, which became the first major central bank to trim rates.

The principal takeaway was that despite recent elevated inflation figures, the Fed's dot plots, and Powell’s remarks hinted at three rate cuts for this year. Should US inflation data begin to decline again, confirming the Fed's doubts regarding early-year inflation spikes, we may witness bearish for the dollar in the months ahead.

For Japanese yen, the focus will be on Tokyo Core CPI, due to be released in the early hours of Friday. Last week, the Bank of Japan made a significant move by ending its eight-year stint with negative interest rates, raising rates from -0.1% to 0% and abandoning its Yield Curve Control (YCC) policy. The yen weakened in response, as this action was not only anticipated but also fell short of market expectations for greater tightening measures from the BoJ. The central bank and yen traders are now watching inflation data closely to work out when the next hike could come. Tokyo is by far Japan's most populous city and unveils CPI data a month before the national figures. This preliminary data is widely regarded as the key indicator of consumer inflation for the nation as a whole.

USD/JPY technical analysis

Source: TradingView.com

At the time of writing, the USD/JPY was flat as a pancake on the week following a sharp two-week rally. The USD/JPY has almost reached the highs that were made in the previous two years at around 151.91 to 151.95. Given how close we are to these levels, a potential breakout looks to be on the cards even if the Japanese officials are trying to talk down the currency pair. That being said, a false breakout scenario or a triple top pattern cannot be ruled out at this point, with the Fed looking to start rate cuts in June. However, for us to turn bearish on the USD/JPY, a reversal signal must first be observed.

Should the USD/JPY break higher, as we suspect that it might, then the next stop could well be the next round handle at 153.00. Thereafter, the USD/JPY could head towards 154.00 and potentially even reach the next psychologically-important area of 155.00, which also corresponds with the 127.2% Fibonacci extension level of the downswing from November to December.

On the downside support comes in at 150.88, which was the high made last month. Below this level lies the 150.00 psychologically important level and then the 149 handle so. So even if the USD/JPY were to pull back a little bit in the next few days or maybe weeks, it's not going to fundamentally change the technical outlook for as long as the low that was hit in March at 146.48 holds as support now.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the company you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade