USD/JPY Bulls to Target 138 as Bulls Show Teeth on Fed Sentiment

It was a quiet start to the week for the USD/JPY. There were no economic indicators from Japan for investors to consider. The lack of stats left investors to respond further to the Friday US Core PCE Price Index numbers and FOMC member Loretta Mester’s hawkish commentary.

With incoming Bank of Japan Governor Kazuo Ueda delivering assurances of maintaining ultra-loose monetary policy, divergence sits squarely in the hands of the Greenback.

However, investors should monitor Bank of Japan board member speeches following last week’s inflation numbers. In January, Japan’s annual inflation rate accelerated from 4.0% to 4.3%, with core inflation up from 4.0% to 4.2%, a four-decade high.

USD/JPY Price Action

At the time of writing, the USD/JPY was down 0.14% to 136.273. A mixed morning saw the USD/JPY rise to an early high of 136.556 before falling to a low of 135.997.

Technical Indicators

The USD/JPY needs to avoid the 135.680 pivot to target the First Major Resistance Level (R1) at 137.307. A move through the morning high of 136.556 would signal a bullish US session. However, the USD/JPY would need Fed chatter and the US stats to support a breakout session.

In the case of an extended rally, the bulls will likely test resistance at 137.500 but fall short of the Second Major Resistance Level (R2) at 138.144. The Third Major Resistance Level (R3) sits at 140.608.

A fall through the pivot would bring the First Major Support Level (S1) at 134.843 into play. However, barring a data-fueled sell-off, the USD/JPY pair should avoid sub-134.500 and the Second Major Support Level (S2) at 133.216. The Third Major Support Level (S3) sits at 130.752.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bullish signal. The USD/JPY sits above the 50-day EMA (134.608). 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 hold above S1 (134.843) and the 50-day EMA (134.608) would support a breakout from R1 (137.307) to target 137.500 and R2 (138.144). However, a fall through S1 (134.843) and the 50-day EMA (134.608) would give the bears a run at the 100-day EMA (133.502) and S2 (133.216). A fall through the 50-day EMA would send a bearish signal.

The US Session

It is a busy day on the US economic calendar. Core durable goods orders for January will be in the spotlight. Following the latest round of US stats, better-than-expected core durable goods orders would further fuel expectations of a more aggressive Fed interest rate trajectory to bring inflation under control.

Pending home sales figures for January will also draw interest. However, US mortgage rates fell from October to January, which drove demand. In contrast, US mortgage rates have shot up in recent weeks, fueled by the shift in sentiment toward Fed monetary policy that has weighed on mortgage applications.

Following the latest Core PCE Price Index numbers, investors should also monitor FOMC member chatter.