USD/JPY Forecast: Lower as Investors Bet on End to Rate-Hike Cycle

Highlights

• USD/JPY down 0.21% on lower inflation indicators
• Producer Price Index drops the most in three years
• Fed funds futures  suggests pause on rate hikes due to economic data

Overview

The Dollar/Yen is edging lower on Friday as traders increased their anticipation of the U.S. Federal Reserve ending its rate-hike cycle soon due to indications of decreasing inflation.

On Thursday, the U.S. Labor Department released data showing the producer price index (PPI) had dropped the most in almost three years in the previous month. This came a day after data on inflation indicated a decrease in consumer prices.

At 08:23 GMT, the USD/JPY is trading 132.302, down 0.281 or -0.21%. On Thursday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $70.20, up $0.23 or +0.33%.

In March, the consumer price index (CPI) showed a slight increase in prices, while the producer price index (PPI) unexpectedly decreased.

Dollar/Yen Traders Anticipating Future Fed Rate Cuts

Both CPI and PPI data are expected to affect future policy decisions of the Federal Reserve, which had suggested that interest rate hikes might soon be paused, depending on economic data.

Despite the Fed’s suggestion of a possible pause on interest rate hikes, money markets are currently pricing in a 69% chance of a 25 basis point rate hike next month. This reflects the sentiment of many investors who are anticipating the Fed’s decision on interest rates at the conclusion of its May meeting.

A series of cuts are also being priced in from July through the end of the year, with rates projected to be just above 4.3% in December. This bearish news is expected to negatively impact the USD/JPY.

Daily USD/JPY Technical Analysis

The main trend is up according to the daily swing chart. However, momentum is trending lower. A trade through 134.044 will signal a resumption of the uptrend. A move through 130.633 will change the main trend to down.

The USD/JPY is currently testing a long-term retracement zone at 132.569 – 131.308 and a cluster of potential short-term levels at 132.339 – 131.843.

On the upside, the resistance zone is 133.776 – 134.752. This area stopped the rally at 134.044 on April 12.

Daily USD/JPY Technical Forecast

Trader reaction to a pair of 50% levels at 132.569 and 132.339 are likely to determine the direction of the USD/JPY on Friday.

Bearish Scenario

A sustained move under 132.339 will indicate the presence of sellers. This could trigger an intraday break into 131.843, followed by 131.308. The latter is the last potential support before the main bottom at 130.633.

Bullish Scenario

A sustained move over 132.569 will signal the presence of buyers. This is a potential trigger point for a jump into a minor pivot at 133.034, followed by a long-term 50% level at 133.776.

Long-term bulls should note that the upside for the USD/JPY will be limited unless 134.752 is taken out with conviction.