The US Dollar (USD) is on the defensive against the Japanese Yen (JPY) after a softer-than-expected US inflation report fueled expectations of a dovish pivot from the Federal Reserve. Core inflation in the US retreated to a 3-year low of 3.6% in April, alongside stagnant retail sales data. This has bolstered bets for two interest rate cuts by the Fed before the year-end, weakening the USD.
Further pressuring the USD is the contrasting performance of the Japanese economy. Despite weaker-than-expected GDP growth in Q1 2024, the Bank of Japan (BOJ) is still considering raising rates, widening the interest rate differential between the US and Japan. This has spurred a flight to safety towards the JPY, traditionally seen as a safe-haven currency.
Technical Analysis
The 4-hour chart shows the USDJPY is currently trading at 154.652, attempting to claw back some losses after a significant decline in the previous session. The price action trades below the 20-SMA (green line), 50-SMA (blue line), and 100-SMA (orange line), indicating a short-term bearish trend. However, the 100-SMA remains above the 50-SMA, suggesting a possible continuation of the uptrend seen earlier.
The RSI (39.81) is recovering from oversold territory, indicating a potential short-term bounce in the USDJPY. However, a sustained rise above 50.00 is needed to confirm bullish momentum. Should the price action sustain a push higher, short-term trading opportunities could exist towards the 155.746 price level. A sustained break above the initial resistance and the SMAs could confirm the bullish momentum, likely bringing the 156.750 and 158.434 resistance levels into play.
However, a successful push lower could offer short-term trading opportunities towards the initial support at 153.248. A break below the initial support would likely bring the 151.841 and 150.811 support levels into play in the short term.
Summary
The USDJPY is under pressure due to a combination of softer US inflation data and potential widening interest rate differentials. Technically, the price action trades below key SMAs with a recovering RSI. The upside faces resistance at 155.746, while a downside move could be cushioned by support at 153.248. The overall sentiment leans towards further weakness in the USDJPY, with a confirmed break below the initial support potentially accelerating the decline.
Sources: TradingView, Trading Economics, Reuters, Dow Jones Newswire, MT Newswire, Cabinet Office, Japan.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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