USD/JPY Analysis: Hangs near weekly low, bulls not ready to give up yet ahead of US PCE

Jun 03, 2023

The USD/JPY pair struggles to capitalize on the overnight modest bounce from the 145.55 region, or the weekly low and attracts fresh sellers on Tuesday. Spot prices remain depressed below the 146.00 mark heading into the European session, though the fundamental backdrop warrants caution before positioning for an extension of this week's pullback from the YTD peak touched on Tuesday. Worries about a deeper global economic downturn drive some haven flows towards the Japanese Yen (JPY), which, in turn, exerts some downward pressure on the major. The US Dollar (USD), on the other hand, finds some support near the very important 200-day Simple Moving Average (SMA) and for now, stalls this week's retracement slide from its highest level since early June. Apart from this, a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and other major central banks, including the Federal Reserve (Fed), keeps a lid on any meaningful gains for the JPY and acts as a tailwind for the pair, at least for the time being.

It is worth recalling that the BoJ is the only central bank in the world to maintain negative interest rates and is expected to stick to its current ultra-easy monetary policy stance. In fact, BoJ board member Toyoaki Nakamura said this Thursday that it was premature to tighten monetary policy as recent increases in inflation were mostly driven by higher import costs rather than wage gains. This follows last week's dovish remarks by BoJ Governor Kazuo Ueda at the Jackson Hole Symposium, saying that the underlying inflation in Japan remains a bit below the 2% target. In contrast, Fed Chair Jerome Powell said last week that the US central bank may need to raise interest rates further to cool still-too-high inflation. This, in turn, lends some support to the USD and should lend some support to the USD/JPY pair. That said, Wednesday's disappointing US macro data fueled speculations that the Fed will soften its hawkish stance. This holds back the USD bulls from placing aggressive bets and does little to attract any meaningful buying around the major.

The ADP National Employment report showed that US private-sector employers added 177K jobs in August, well below the previous month's downwardly revised reading of 324K. Adding to this, the revised estimate of the US GDP print indicated that the world's largest economy expanded by a 2.1% annualized pace during the second quarter against the 2.4% growth expected initially. This was seen as a sign that the surprisingly resilient US economy might be starting to lose steam in the wake of rapidly rising interest rates. this, in turn, reaffirmed market expectations that the Fed will pause its rate-hiking cycle in September. The markets, however, are still pricing in the possibility of one more 25 bps lift-off by the end of this year, which favours the USD bulls. Apart from this, a generally positive risk tone could undermine the safe-haven JPY and further contribute to limiting the downside for the USD/JPY pair. Traders now look forward to other important US macro data for a fresh impetus later during the early North American session.

Thursday's US economic docket highlights the release of the Core PCE Price Index – the Fed's preferred inflation gauge – and the usual Weekly Initial Jobless Claims. Apart from this, the closely-watched US monthly employment details – popularly known as the NFP report – should drive market expectations about the Fed's future rate-hike path. This, in turn, will play a key role in influencing the USD price dynamics and determining the next leg of a directional move for the USD/JPY pair.

From a technical perspective, spot prices – barring this week's knee-jerk spike to the upside – have been oscillating in a familiar band over the past three weeks or so. Against the backdrop of a rally from the very important 200-day SMA, tested in July, the range-bound price action might still be categorized as a bullish consolidation phase. Moreover, oscillators on the daily chart are holding comfortably in the positive territory and are still far from being in the overbought zone. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside and supports prospects for an eventual breakout through the short-term trading range.

Bulls, however, might wait for a sustained move beyond the 146.60 immediate hurdle before placing fresh bets and positioning for a move back towards reclaiming the 147.00 round figure and testing the YTD peak, around the 147.35-147.40 region. Some follow-through buying should pave the way for an extension of the upward trajectory towards the 148.00 mark en route to the next relevant hurdle near the 148.40 region and the 149.00 level.

On the flip side, the overnight swing low, around the 145.55 zone, now seems to protect the immediate downside, below which the USD/JPY pair could slide to the 145.00 psychological mark. Any subsequent fall might continue to find decent support near the 144.75-144.65 strong horizontal resistance breakpoint. A convincing break below the latter, however, might prompt some technical selling and shift the near-term bias in favour of bearish traders. Spot prices might then turn vulnerable to weaken further below the 144.00 mark and accelerate the fall towards the 143.40-143.35 region.

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