Dollar Decline Provides Respite for the Yen

USD/JPY News and Analysis

BoJ Governor Ueda in No Hurry to Alter Course

BoJ Governor Kazuo Ueda stressed that the Bank is in no rush to alter the path of monetary policy despite interest rates holding above the 2% target since early 2022. The pick up in inflation has been attributed to supply side effects created by the demand and supply mismatch brought about as a result of the Covid-19 lockdowns and Russia Ukraine war.

However, this morning at a platform for Japan’s government draft economic policy, it was declared that the government will eradicate a deflationary mindset and move towards ending deflation with bold monetary policy, flexible fiscal policy and with its growth strategy. Additionally, the draft policy issued hope that the BoJ achieves a sustainable 2% inflation target, accompanied by welcomed wage growth. The news helped the pair continue to ease lower in early European trading.

USD/JPY Technical Analysis and Key Levels of Interest

USD/JPY turned lower at the beginning of the week when news of a provisional agreement to raise the debt ceiling filtered into the market. Since then, interest rate expectations have reversed course, initially favouring a 25-basis point hike and now largely favouring the no hike or “skip” outcome. As such, a weaker dollar has benefitted the yen which now sees the pair on track for 5 consecutive days of declines.

The 138.20 and 138.00 zone of support currently appears as the next area of support, followed by the 200 SMA which hovers around 137.27 at present. The downward momentum is supported by the return from overbought territory on the RSI towards neutral levels, alleviating pressure on Japanese officials that had to issue a warning that they are closely watching speculative moves in the currency market. Resistance lies all the way at 140/142.25, some distance away.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

IG Client Sentiment Hints at Continued Sell-off

Short positioning has been building up as the pair advanced higher and higher. Now, as USD/JPY eases, there should be a converging between longs and shorts as shorts exit as the move unfolds. Nevertheless, guidance from the contrarian indicator suggests more downside price action to come.

USD/JPY:Retail trader data shows 30.21% of traders are net-long with the ratio of traders short to long at 2.31 to 1.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

The number of traders net-long is 3.87% higher than yesterday and 3.17% lower from last week, while the number of traders net-short is 3.25% lower than yesterday and 7.63% lower from last week.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/JPY price trend may soon reverse lower despite the fact traders remain net-short.

Major Risk Events over the Next Week

Today at 13:30 UK time, US non-farm payroll data is anticipated to reveal a fewer number of jobs being added in May compared to April. Actual prints have varied significantly from prior estimates so be prepared for increased volatility in the event we see another departure from the consensus figure of 190k. If yesterday’s ADP (private payroll data) beat and increased employment number within the ISM manufacturing PMI are anything to go by, we could very well see a print above expectations. However, it must be said that ADP has proven an unreliable predictor of NFP data and the jury is still out on whether its new methodology is any better than the last. A sizeable beat may see an uptick in rate expectations, lifting the dollar, and by extension, USD/JPY. A miss could add to the current sell-off as traders get behind an interest rate skip later this month.

US services PMI will be a crucial data point in analysing the state of the US economy at a time when equity indices surge on thanks to a handful of massive tech and AI-aligned names. Towards the end of next week Japan will see the final GDP figure for Q1 – which is likely to confirm a much improved outlook than what emerged in the final quarter of last year.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX