The yen is losing bullish momentum again. After a short-term correction, USD/JPY again headed upward, thereby confirming the resilience of the uptrend. To be fair, the US dollar index has been growing for the second day in a row, reacting to hawkish statements from Fed policymakers. But still, USD/JPY has been trading robustly in terms of dynamics among the major dollar pairs. Buyers are actively regaining lost positions. So, in the short term, the instrument may return to the area above 156. This dynamic is caused not only by the recovery of the US dollar but also by the weakening of the yen.
Let's discuss the greenback for a start. By and large, the dollar managed to stay afloat only thanks to the Federal Reserve, whose representatives gave cautious comments on the latest inflation reports. Let me remind you that all components of the consumer price index went down in April – both in annual terms and on a monthly basis. In contrast, the producer price index, on the contrary, increased. The annual PPI rose to 2.2% (an increase recorded for the third month in a row). This is the strongest figure since November last year. The core PPI updated its 7-month high, increasing to 2.4% y/y, the strongest growth rate since September 2023.
Immediately after the publication of inflation reports, the probability of maintaining the status quo at the Fed's meeting in September decreased to 25% whereas the probability of a rate cut by 25 basis points grew to 55%, by 50 basis points to 20%.
Fed officials could "cement" these market expectations if they softened their rhetoric. But events unfolded according to a different scenario.
In particular, Federal Reserve Bank of New York President John Williams, commenting on the latest releases, said that he does not see any need to lower the interest rate at all in the near future. According to him, he still has no confidence that inflation is moving steadily towards the target level of two percent.
His colleague, Atlanta Fed President Raphael Bostic also said that lowering the funds rate this year is not a rock-solid conclusion. According to him, one cannot draw conclusions based on one report, because "one release is not a trend."
Another Fed official, Kansas City Fed Governor Jeffrey Schmid voiced similar rhetoric, saying that US inflation remains too high and the Fed "still has a lot of work to do." In this context, he said that the funds rate may remain at the current high level for a longer time.
Cleveland Fed President Loretta Mester took a similar stance, adding that the Fed risks little by keeping policy unchanged. From her viewpoint, maintaining the current funds rate's level will help bring "still high inflation" down to the target level.
In the end, Jerome Powell made it clear this week that the Fed would keep the funds rate at the current level for a long time. He assessed the likelihood of tightening the policy as "low." However, he did not discuss the timing of monetary easing. This is a good omen to the dollar bulls.
In other words, Fed policymakers threw a lifeline to the dollar, thanks to which it was able not only to stay afloat, but also to show character - especially when trading against the yen.
Moreover, the yen found itself under pressure from fundamental factors. In particular, yesterday it became known that inflation in Japan was likely to decline further in April. The core consumer price index slowed to 2.2% last month, its lowest since January this year, after rising to 2.6% in March, according to a Reuters poll. Whether this is true or not, we will find out next week. The inflation report will be published on May 24.
In addition, the Japanese currency was hit by a wave of sell-offs after yesterday's report, which reflected a slowdown in Japan's economic growth in the first quarter. GDP contracted by 0.5%, against a forecast of a contraction of 0.3% and after weak growth of 0.1% in the fourth quarter of last year. Tepid inflation forecasts and economic growth data further reduce the likelihood that the Bank of Japan will raise interest rates in the foreseeable future.
Thus, the current fundamental background contributes to the further growth in USD/JPY. At the moment, on the daily chart, the instrument is between the middle and upper borders of the Bollinger Bands indicator, testing the resistance level of 156.00 (Kijun-sen level on the D1 timeframe). After the price consolidates above this pivot level, the Ichimoku indicator will generate a bullish signal, Parade of Lines. The first target of the upward move is located at 157.00, the upper border of the Bollinger Bands indicator on the four-hour chart. The main target is 157.90, the upper line of the Bollinger Bands indicator on the daily chart.
