USD/JPY Return to 141 Hinged on a Hawkish Fed Pause

It is a quiet start to another big day for the USD/JPY. There were no economic indicators from Japan or China to draw interest this morning.

The lack of economic indicators left investors to respond further to the overnight US CPI Report and consider the Fed interest rate decision and the FOMC projections.

As things stand, monetary policy divergence remains in favor of the dollar despite bets of a Fed pause this evening. While the probability of a June Fed interest rate hike has eased, the chances of a 25-basis point July hike have increased. In contrast, the Bank of Japan stands by its ultra-loose monetary policy mantra.

USD/JPY Price Action

This morning, the USD/JPY was down 0.10% to 140.06. A mixed start to the day saw the USD/JPY rise to an early high of 140.289 before falling to a low of 139.937.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to avoid the 139.841 pivot to target the First Major Resistance Level (R1) at 140.673. A move through the Tuesday high of 140.307 would signal a bullish USD/JPY session. However, US economic indicators and the Fed must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 141.138 and resistance at 141.5. The Third Major Resistance Level (R3) sits at 142.435.

A fall through the pivot would bring the First Major Support Level (S1) at 139.376 into play. However, barring a dovish Fed pause, the USD/JPY pair should avoid sub-139 and the Second Major Support Level (S2) at 138.544. The Third Major Support Level (S3) sits at 137.247.

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The USD/JPY sat above the 50-day EMA (139.531). The 50-day pulled 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 the 50-day EMA (139.531) would support a breakout from R1 (140.673) to target R2 (141.138) and 141.5. However, a fall through the 50-day EMA (139.531) would bring S1 (139.376) and the 100-day EMA (139.091) into view. A USD/JPY fall through the 50-day EMA would send a bearish signal.

The US Session

Looking ahead to the US session, it is a busy day on the US economic calendar. US wholesale inflation numbers will draw interest ahead of the Fed policy decision.

Softer-than-expected US wholesale inflation numbers should further ease pressure on the Fed to push interest rates higher.

The US CPI Report impacted market sentiment toward Fed interest rates on Tuesday.

According to the CME FedWatch Tool, bets on the Fed hiking rates by 25 basis points in June tumbled in response to the inflation numbers. The probability of a June 25-basis point interest rate hike fell from 20.9% to 4.6%, with the chances of a July 50-basis point interest rate hike falling from 14.0% to 2.9%.

However, the probability of a 25-basis point July hike increased from 59.9% to 60.9%.

While the inflation numbers will draw interest, the FOMC interest rate decision, economic projections, and press conference will be the focal points. A hawkish pause would bring 141 levels into play.