USD/JPY at Risk of Sub-138.50 on Weak US Service Sector Data

It is a relatively busy Tuesday morning for the USD/JPY. Household spending figures from Japan drew interest. While recent economic indicators supported a more bullish economic outlook, today’s numbers provided the Bank of Japan little reason to tweak its ultra-loose monetary policy stance.

Household spending fell by 1.3% in April versus a 0.8% decline in March. Year-over-year, household spending was down 4.4% versus a forecasted 0.4% increase. In March, household spending declined by 1.9% year-over-year.

According to the Statistic Bureau,

• Spending on education tumbled by 19.5% year-over-year, with spending on housing down 15.3%.
• Household spending on other consumption expenditures fell by 11.5%, with clothing & footwear (-9.5%) also down year-over-year.

While the markets continue to speculate on the timing of a Bank of Japan policy shift, monetary policy divergence favors the dollar. However, the US ISM Non-Manufacturing PMI numbers provided the Fed doves with more reason to push for a June pause.

According to the CME FedWatch Tool, the probability of a 25-basis point June interest rate hike slipped from 25.3% to 21.2% on Monday versus 64.2% one week earlier.

USD/JPY Price Action

This morning, the USD/JPY was up 0.01% to 139.583. A mixed start to the day saw the USD/JPY fall to an early low of 139.322 before rising to a high of 139.658.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to move through the 139.759 pivot to target the First Major Resistance Level (R1) at 140.270 and the Monday high of 140.453. A return to 140 would signal a bullish USD/JPY session. However, market risk sentiment and Fed chatter must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 140.964 and resistance at 141. The Third Major Resistance Level (R3) sits at 142.160.

Failure to move through the pivot would leave the First Major Support Level (S1) at 139.065 in play. However, barring a risk-off fueled sell-off, the USD/JPY pair should avoid sub-138.50. The Second Major Support Level (S2) at 138.554 should limit the downside. The Third Major Support Level (S3) sits at 137.349.

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The USD/JPY sat above the 50-day EMA (139.428). The 50-day pulled 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 50-day EMA (139.428) would support a breakout from R1 (140.270) to target R2 (140.964) and 141. However, a fall through the 50-day EMA (139.428) would bring S1 (139.065) and the 100-day EMA (138.613) into view. A USD/JPY fall through the 50-day EMA would send a bearish signal.

The US Session

It is a quiet session on the US economic calendar. There are no economic indicators to move the dial. The lack of economic indicators will leave Fed chatter to influence.