USD/JPY and 141 in the Hands of Inflation and US Debt Ceiling Talks

It is a busier start to the day for the USD/JPY. Tokyo inflation numbers for May will draw interest this morning. Hotter-than-expected national inflation numbers fueled talk of a possible tweak to the Bank of Japan’s ultra-loose monetary policy stance.

The Tokyo numbers for May will further influence investor sentiment toward monetary policy. Economic indicators from Japan have delivered mixed signals. While private sector PMI numbers signaled an improving macroeconomic environment, core machinery orders unexpectedly slumped, with exports to China falling.

In contrast, sentiment toward the June FOMC meeting has turned more hawkish. Following better-than-expected labor market and GDP numbers on Thursday, the probability of a June rate hike jumped overnight.

According to the CME FedWatch Tool, the probability of a 25-basis point Fed interest rate hike in June increased from 36.4% to 52.2% on Thursday. The more hawkish sentiment supports further upside for the USD/JPY.

USD/JPY Price Action

This morning, the USD/JPY was flat at 140.038. A mixed start to the day saw the USD/JPY fall to an early low of 140.004 before rising to a high of 140.104.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to avoid the 139.693 pivot to target the First Major Resistance Level (R1) at 140.576. A move through the Thursday high of 140.230 would signal a bullish USD/JPY session. However, US stats and debt ceiling news must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 141.113. The Third Major Resistance Level (R3) sits at 142.533.

A fall through the pivot would bring the First Major Support Level (S1) at 139.156 into play. However, barring a risk-off fueled sell-off, the USD/JPY pair should avoid sub-138.5 and the Second Major Support Level (S2) at 138.273. The Third Major Support Level (S3) sits at 136.853.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The USD/JPY sits above the 50-day EMA (138.157). The 50-day pulled further away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A USD/JPY hold above the Major Support Levels and 50-day EMA (138.157) would support a breakout from R1 (140.576) to target R2 (141.113). However, a fall through the S1 (139.156) would bring S2 (138.273) and the 50-day EMA (138.157) into view. A USD/JPY fall through the 50-day EMA would send a bearish signal.

The US Session

Looking ahead to the US session, it is a busy day on the US economic calendar. Core durable goods orders, Core PCE Price Index, personal spending/income, and Michigan consumer sentiment numbers will be in focus.

We expect the Core PCE Price Index numbers to have the most impact. Sticky inflation would fuel bets of a 25-basis point Fed interest rate hike in June and ease expectations of an H2 interest rate cut.

Economists forecast the Core PCE Price Index to increase by 4.6% year-over-year in April versus 4.6% in March.