USD/JPY and a Return to 138 in the Hands of the Federal Reserve

It is a quiet start to the day for the USD/JPY. There are no economic indicators from Japan for investors to consider, with the Japanese markets closed for Constitution Day.

The lack of economic indicators will leave the USD/JPY to respond further to the US numbers from Tuesday. Significantly, JOLT’s Job Openings fell from 9.974 million to 9.590 million. The rate of quits was reportedly little changed at 2.5%, though the number of quits in the accommodation and food services industry fell by 178,000, a signal of deteriorating sector conditions.

While the overnight stats may not influence the Fed interest rate decision, cracks are appearing in the US economy that could rein in hawkish June bets. US factory orders fell short of forecasts for March, rising by 0.9% versus a forecasted 1.1%. Orders declined by 1.1% in February.

However, the weaker macroeconomic environment supports the Bank of Japan’s policy outlook, leaving monetary policy divergence in favor of the dollar.

USD/JPY Price Action

This morning, the USD/JPY was up 0.01% to 136.520. A mixed start to the day saw the USD/JPY rise to an early high of 136.610 before falling to a low of 136.386.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to move through the 136.866 pivot to target the First Major Resistance Level (R1) at 137.418. A return to 137 would signal a bullish USD/JPY session. However, the market risk sentiment and the Fed must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test resistance at the Tuesday high of 137.773 and 138 but fall short of the Second Major Resistance Level (R2) at 138.325. The Third Major Resistance Level (R3) sits at 139.784.

Failure to move through the pivot would leave the First Major Support Level (S1) at 135.959 in play. However, barring a dollar sell-off, the USD/JPY pair should avoid sub-135.5 and the Second Major Support Level (S2) at 135.407. The Third Major Support Level (S3) sits at 133.948.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The USD/JPY sits above the 50-day EMA (135.364). The 50-day EMA 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 holding above the Major Support Levels and the 50-day EMA (135.364) would support a breakout from R1 (137.418) to target R2 (138.325). However, a fall through S1 (135.959) would bring S2 (135.407) and the 50-day EMA (135.364) into view. A 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. The US ADP nonfarm employment change and the all-important ISM Non-Manufacturing PMI will be in focus.

While the markets will consider the stats, the Fed will be the focal point. Investors expect a 25-basis point Fed interest rate hike. However, there is a high degree of uncertainty on whether the Fed will aim to deliver another 25-basis point hike in June.

After the latest Core PCE Price Index numbers, today’s stats could influence the decision.

Economists forecast the ADP to report a 150k increase in nonfarm payrolls and for the ISM Non-Manufacturing PMI to rise from 51.2 to 51.8.