Japanese yen breakout looks premature as USD/JPY eyes FOMC minutes, PCE data next

Will USD/JPY weakness prevail?

Lately, the Japanese yen has finally been finding some footing against the US dollar. Over the past two weeks, USD/JPY declined by over two percent. That was the worst two-week period since June 2020. This has been in stark contrast with general Yen weakness going back all the way to the beginning of 2021. Is this near-term noise, or is more smooth sailing ahead for the Japanese currency?

The yen’s strength is not unprecedented. In fact, it has been occurring amidst an increasingly favorable environment for the anti-risk currency. For starters, JPY has been receiving a bid amid rising market volatility. This has been leaving it in a very competitive position against the sentiment-linked Australian, New Zealand and Canadian sdollars.

Against the US dollar, it is a different fundamental story. Both the US dollar and Japanese yen exhibit anti-risk dynamics. The more important focus for USD/JPY is thus on relative monetary policy between the Federal Reserve and the Bank of Japan. The latter has not been doing much in terms of shifting its dovish view, but the markets are starting to reprice what the former could do in the future.

In the chart below, the markets have been materially pulling back 2023 Federal Reserve tightening expectations. This has been occurring amidst a deterioration in longer-term inflation expectations. Meanwhile, it seems we are starting to see the very early stages of Fed pivot expectations for this year. Odds of a September 50-basis point rate hike have been fading amid rising growth concerns.

If this trend continues, it is reasonable to expect more USD/JPY weakness. However, key data this week could offer the US Dollar strength. These include the FOMC meeting minutes on Wednesday and PCE figures on Friday. The latter is the central bank’s preferred gauge of inflation, with the core reading expected at 4.9% y/y in April from 5.2% prior. The data is for the same period when headline inflation surprised higher. A much softer outcome in the PCE data could amplify USD/JPY’s descent.

USD/JPY fundamental drivers – daily chart

USD/JPY technical analysis

With that in mind, traders ought to treat USD/JPY’s recent breakout with a grain of salt. The pair just barely closed under the April 27th low at 126.952. Moreover, the 50-day Simple Moving Average remains in play and can reorient the pair to the upside. Such an outcome would place the focus on 131.256 resistance. Otherwise, confirming a breakout under the SMA could spell further trouble for USD/JPY. That would place the focus on the former 125.108 – 123.862 resistance zone.

Daily chart

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