USD/JPY Bears Target 131.5 as More Cracks Appear in the US Economy

It is a quiet morning for the USD/JPY. There were no economic indicators from Japan to draw interest. The lack of stats will leave investors to consider the overnight US wholesale inflation and jobless claims figures.

While a sharp fall in the US producer price index and a larger-than-expected increase in US jobless claims were bearish, investor bets of a 25-basis point Fed interest rate hike in May remained relatively steady this morning.

According to the FedWatchTool, the probability of a 25-basis point Fed interest rate hike in May fell from 70.4% to 68.3% overnight. The numbers support one more hike in May before considering a rate cut in H2 2023.

With the Bank of Japan yet to shift rhetoric away from ultraloose monetary policy, monetary policy divergence remains in favor of the Greenback.

The lack of economic indicators leaves investors to consider Bank of Japan member commentary throughout the morning session. BoJ Governor Ueda has stuck to his guns this week, assuring the markets that the ultraloose monetary policy stance is here to stay.

USD/JPY Price Action

This morning, the USD/JPY was flat at 132.563. A mixed start to the day saw the USD/JPY fall to an early low of 132.501 before rising to a current high of 132.610.

Technical Indicators

The USD/JPY needs to move through the 132.657 pivot to target the First Major Resistance Level (R1) at 133.295 and the Thursday high of 133.394. A return to 133 would signal a bullish USD/JPY session. However, US economic indicators 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 134.032. The Third Major Resistance Level (R3) sits at 135.407.

Failure to move through the pivot would leave the First Major Support Level (S1) at 131.920 in play. However, barring another data-fueled sell-off, the USD/JPY pair should avoid sub-131.500 and the Second Major Support Level (S2) at 131.282. The Third Major Support Level (S3) sits at 129.907.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The USD/JPY sits below the 100-day EMA (132.643). The 50-day EMA pulled back from the 200-day EMA, with the 100-day EMA falling back from the 200-day EMA, delivering bearish signals.

A USD/JPY move through the EMAs would support a breakout from R1 (133.295) to target R2 (134.032). However, failure to move through the EMAs would leave S1 (131.920) in view. A move through the 50-day EMA (132.697) would send a bullish signal.

The US Session

Looking ahead to the US session, it is another busy day on the US economic calendar.

US core retail sales, industrial production, and Michigan Consumer Sentiment figures will move the dial. With investors mindful of the mild recession warning, a slump in consumer sentiment and weaker-than-expected retail sales and industrial production figures could further pressure the US dollar.

Investors should also monitor Fed chatter on monetary policy and the US economy. FOMC member Waller will speak today.