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USD/JPY reflects market hesitancy around 20-year high above 134.00; ECB, US inflation watched
During a five-day rally, the USD/JPY exchange rate dribbles about a multi-year high, with light buying pressure. The positive bias is supported by rising rates and monetary policy divergence between the Federal Reserve and the Bank of Japan. Demand for USD as a safe haven in the face of inflation and GDP uncertainties also favors gains.
In anticipation of important data/events, USD/JPY bulls take a pause at a two-decade high. Consequently, the yen pair declines from the 20-year high to 134.30 during Thursday's Asian session, but remains slightly bought while printing the five-day uptrend.
Recent USD/JPY gains have been hampered by choppy movements in US Treasury rates and US stock futures, which reflect traders' hesitation and limit USD/JPY gains. Following an increase of five basis points (bps) to 3.04 percent the previous day, the 10-year US Treasury yield fluctuates about 3.034 percent. In addition, S&P 500 Futures post modest losses at 4,110 after Wednesday's reversal of a two-day rally. It is important to note that Wall Street benchmarks also closed in the red the day before.
The market's hesitancy may be attributable to inflation and economic concerns, as well as hawkish expectations from European Central Bank (ECB) officials and anticipation for higher US inflation statistics.
The market attitude appears to have been undermined by rumors that a more rapid normalization of monetary policy may weigh on the economic transition, especially in light of recent economic and geopolitical issues. White House spokesperson Karine Jean-Pierre stated on Wednesday that the White House anticipates the inflation data to be revealed at the end of the week to be elevated. In addition, the Organisation for Economic Co-operation and Development (OECD) reduces its global growth forecast for 2022, and the president of the World Bank (WB), David Malpass, warns that faster-than-anticipated tightening might trigger a debt crisis comparable to that of the 1980s.
In a similar vein, the tone remains cautious ahead of this week's US Consumer Price Index (CPI) data for May, particularly in light of the worse readings of the Fed's favored inflation indicator, namely the Core PCE Price Index. In spite of this, US inflation expectations, as measured by the 10-year breakeven inflation rate according to data from the St. Louis Federal Reserve (FRED), remain stronger around the one-month high.
Above all, hawkish Fed predictions and the Bank of Japan's (BOJ) reluctance to tighten appear to be the driving force behind the USD/JPY rally. BOJ Governor Haruhiko Kuroda stated on Wednesday that the BOJ must continue to promote economic activity by maintaining the current monetary easing policy.
Due to its direct influence on the US dollar and market sentiment, today's monetary policy decision by the European Central Bank (ECB) will be significant for the USD/JPY pair in the near future. The inflation figures from China and the United States on Friday will be vital to monitor for additional impetus.
Technical Evaluation
Near 134.60, an overbought RSI joins an immediate resistance line to challenge USD/JPY bulls. However, sellers are unlikely to enter the market unless the price remains above May's high of 131.35.
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