USD/JPY Bulls to Target a Return to 138.50 on Hawkish Fed Bets

It was a busier start to the day for the USD/JPY. GDP numbers for Q4 were in focus this morning.

The Japanese economy stalled in Q4 versus a forecasted 0.2%. In Q3, the economy contracted by 0.3%. Year-over-year, the economy grew by 0.1% versus a forecasted 0.8%. The economy contracted by 1.0% in Q3, according to the Ministry of Foreign Affairs.

However, the GDP numbers had a muted influence on the USD/JPY. The Bank of Japan remains committed to ultra-loose monetary policy near term, leaving monetary policy divergence in favor of the US dollar.

Overnight, US labor market numbers justified Fed Chair Powell’s hawkish testimony from Tuesday, supporting a 50-basis point rate hike in March. It will come down to the US Jobs Report on Friday.

USD/JPY Price Action

At the time of writing, the USD/JPY was down 0.26% to 136.939. A mixed start to the day saw the USD/JPY rise to an early high of 137.352 before falling to a low of 136.797.

Technical Indicators

The USD/JPY needs to move through the 137.226 pivot to target the First Major Resistance Level (R1) at 137.978. A move through the Wednesday high of 137.911 would signal a bullish USD/JPY session. However, the USD/JPY would need hawkish Fed chatter and the jobless claims numbers to support a breakout.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 138.664. The Third Major Resistance Level sits at 140.102.

Failure to move through the pivot would leave the First Major Support Level (S1) at 136.540 in play. However, barring a data-fueled sell-off, the USD/JPY pair should avoid sub-136 and the Second Major Support Level (S2) at 135.788. The Third Major Support Level (S3) sits at 134.350.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bullish signal. The USD/JPY sits above the 50-day EMA (136.257). 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 hold above S1 (136.540), and the 50-day EMA (136.257) would support a breakout from R1 (137.978) to target R2 (138.664). However, a fall through S1 (136.540) would give the bears a run at the 50-day EMA ($136.257). A fall through the 50-day EMA would send a bearish signal.

The US Session

Looking ahead to the US session, it is a quieter day on the US economic calendar. Following the better-than-expected ADP nonfarm employment change and JOLTs Job Openings on Wednesday, the focus will turn to the jobless claims report.

Economists forecast initial jobless claims to rise from 190k to 195k, which would continue to signal tight labor market conditions.

Following two days of Fed Chair Powell testimony, investors should also monitor FOMC member chatter ahead of the blackout period that begins on March 11.