USD/JPY Forecast: Steady as Positive Economic Data Eases Recession Concerns

Highlights

• USD/JPY shows minimal changes as positive economic data boosts risk sentiment.
• Expectations of Bank of Japan maintaining ultra-low interest rates drive yen’s decline.
• Resilient US economic data strengthens case for Fed rate hike.

Overview

The USD/JPY showed minimal changes on Wednesday as positive economic data eased concerns of a recession and lifted risk sentiment. The Japanese yen initially strengthened against the dollar but remained close to its seven-month low reached on Tuesday. Market expectations of the Bank of Japan (BOJ) keeping interest rates ultra-low have driven the yen’s declines, putting pressure on Japanese authorities to take action.

Intervention Expectations Rising

With the dollar expected to continue rising against the yen, there is an increased likelihood of the Ministry of Finance intervening in the foreign exchange market by purchasing the JPY. However, the decision to intervene will primarily depend on the speed of change rather than the absolute level of the exchange rate.

Strong US Economy Raises Rate Hike Probabilities

Meanwhile, US economic data painted a positive picture, with consumer confidence reaching its highest level in nearly 1-1/2 years and business spending holding up in May. This indicates a solid footing for the US economy. Market expectations are currently pricing in a 77% probability of a 25 basis point rate hike by the Federal Reserve next month, according to the CME FedWatch tool.

Powell Expected to Reaffirm Hawkish Tone

The data reinforces the notion of “sectoral recessions”. This would affect different industries with varying lags, making it challenging for the Fed to combat inflation. It suggests that the Fed will need to maintain its tightening stance. Market participants will closely watch Fed Chair Jerome Powell’s remarks at the European Central Bank Forum in Sintra, Portugal, where he is expected to reaffirm his hawkish policy stance. However, it is unlikely that his comments will significantly impact the pricing of the Federal Open Market Committee (FOMC).

Bullish Outlook Despite Intervention Concerns

In conclusion, resilient economic data has bolstered risk sentiment, leading to little change in the USD/JPY. Market expectations of further rate hikes by the Federal Reserve persist, but the focus now turns to Powell’s comments at the ECB Forum. The Japanese authorities may consider intervention in the foreign exchange market given the yen’s decline.

Technical Analysis

The USD/JPY market remains bullish with the current price of 144.115 slightly higher than the previous close. The price is above both the 200-4H and 50-4H moving averages, indicating a positive trend. The 14-4H RSI stands at 67.16, reflecting favorable market momentum.

Main support is found between 141.206 and 141.476, while the resistance area ranges from 143.682 to 143.874. The USD/JPY is currently trading on the strong side of the resistance zone, making it potential support. These factors point to a bullish sentiment in the market.

Traders should closely monitor any changes in market dynamics, support, and resistance levels, as they may impact the overall trend of the USD/JPY pair. This is especially important if there is a breakout to the upside as traders speculate that a test of 145.000 could draw the attention of the Bank of Japan (BOJ). This could lead to an intervention and a subsequent sell-off.