The USDJPY currency pair is on track for its third consecutive week of gains, opening Monday with a strong start despite growing expectations of rate cuts from the Federal Reserve in March. The impressive surge in the Nikkei to its highest point in 34 years has come at the detriment of the Japanese Yen, fuelling the currency pair’s upward momentum.
However, the market experienced a shift in sentiment on Friday, as the US producer price index data revealed a year-over-year PPI of 1%, falling below the anticipated 1.3%. This unexpected development strengthened the belief in the market that the first round of monetary easing will commence in March. According to the CME FedWatch Tool, there is now a 73% likelihood of lower rates after the upcoming meeting, marking a notable increase from the 65% probability observed just a week ago, which could cap the currency pair’s upward momentum.
Technical
The upward channel on the 4H chart has held firm as the 25-SMA (green line) converged with the dynamic support to prevent a breakdown in recent sessions. If this support continues to hold, the retracement of the prior downtrend could continue, with some psychological resistance levels not far away.
If the pair can clear resistance at 145.519, the retracement could reach the Fibonacci midpoint at 146.106. This could be the first test of the retracement’s strength, which could result in a temporary pullback. However, if the momentum pushes the price action higher, the uptrend could be sustained, bringing higher resistance at 146.643 and 147.167 into play before the 61.8% Fibonacci golden ratio could be reached at 147.480.
In contrast, a channel breakdown could occur if the 25-SMA support fails in the upcoming sessions. The 50-SMA (blue line) could provide a barrier to the bearish momentum at 144.558 and could present a difficult challenge for the sellers. However, if the bears manage to break down this support, it could signal a shift in sentiment, potentially triggering a sustainable downturn toward 143.686 and 143.427, the 100-SMA (orange line).
Summary
With the strong performance in the Japanese equity market, the Yen has retreated, much to the benefit of the USDJPY currency pair. However, the gains could be capped by the retreat of the US dollar as the market continues to bet on rate cuts to occur in March. The 25-SMA support is keeping the ascending channel in play and could see the currency pair riding out the upward momentum in the upcoming sessions.
Sources: Koyfin, Tradingview, CME Group
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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