USD/JPY Faces Further Downside Risk and a Return to Sub-138

It is a quiet morning for the USD/JPY. There are no economic indicators from Japan for investors to consider. The lack of stats left investors to digest the Q1 GDP numbers from Japan and the overnight jobless claims figures from the US that may have narrowed the monetary policy divergence gap in favor of the Yen.

While there are no stats from Japan to provide direction, economic indicators from China moved the dial earlier today.

The annual inflation rate picked up from 0.1% to 0.2% in May versus a forecasted 0.4%. Inflation remained soft, with consumer prices falling by 0.2%. In April, consumer prices declined by 0.1%.

However, the Producer Price Index garnered more interest, falling by 4.6% year-over-year versus 3.6% in April. Economists forecast the Producer Price Index to decline by a more modest 2.8%.

USD/JPY Price Action

This morning, the USD/JPY was up 0.26% to 139.283. A mixed start to the day saw the USD/JPY fall to an early low of 138.757 before rising to a high of 139.296.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to move through the 139.319 pivot to target the First Major Resistance Level (R1) at 139.829 and the Thursday high of 140.226. A return to 139.50 would signal a bullish USD/JPY session. However, market risk sentiment must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test 140.50 but fall short of the Second Major Resistance Level (R2) at 140.736. The Third Major Resistance Level (R3) sits at 142.153.

Failure to move through the pivot would leave the First Major Support Level (S1) at 138.412 in play. However, barring a risk-off fueled sell-off, the USD/JPY pair should avoid sub-138 and the Second Major Support Level (S2) at 137.902. The Third Major Support Level (S3) sits at 137.902.

Looking at the EMAs and the 4-hourly chart, the EMAs sent bearish signals. The USD/JPY sat below the 50-day EMA (139.449). The 50-day closed in on the 100-day EMA, with the 100-day EMA narrowing to the 200-day EMA, delivering bearish signals.

A USD/JPY move through the 50-day EMA (139.449) would support a breakout from R1 (139.829) to target R2 (140.736). However, a fall through the 100-day EMA (138.876) would bring S1 (138.412) into view. A USD/JPY move through the 50-day EMA would send a bullish signal.

The US Session

It is another quiet US session. There are no US economic indicators to shift investor sentiment toward the US economy and Fed monetary policy.

On Thursday, a larger-than-expected rise in US jobless claims sent the USD/JPY to sub-139. Softer service sector activity and a contraction in the manufacturing sector reflected the effects of the Fed’s policy maneuvers to tame inflation.

The latest US Jobs Report and Thursday’s jobless claims showed the first cracks in the US labor market, which could allow the Fed to take a less aggressive interest rate trajectory to bring inflation to target.

However, no FOMC members are speaking today. The Fed entered the blackout period that ends on June 15.

According to the CME FedWatch Tool, the probability of a 25-basis point June interest rate hike fell from 33.8% to 27.5% in response to the jobless claims numbers.