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Fed Powell Speech – 2.30 PM EST Wednesday
Core PCE – 9.30 AM EST Thursday
NFP – 8.30 AM EST Friday
BOJ Kuroda speaks – 9.30 PM EST Friday
The movement has been sluggish on USDJPY for the past 3 days as the pair began to consolidate into a triangle formation. Market is seen to be more indecisive ahead of Fed Powell’s speech later tonight and payroll data on Friday. But we are noticing something more critical here- the pair is on the verge of a potential explosive breakout.
Let’s zoom out to look at the bigger picture.
Marked on the chart is a solid rising trendline on the daily timeframe and USDJPY is seemingly breaking it, though the 138.70 price zone is still providing some much needed support for the dollar. In most cases, we would witness an aggressive reaction, either a breakout or a bounce when price is at a major crossroad but the impending Fed speech and NFP is putting market participants on heels.
There is a great likelihood of a breakout, and let’s briefly cover the fundamental developments and evaluate if this is a great opportunity to capitalise on.
Why is the dollar not gaining any traction against Yen when most Fed members are still being hawkish while the BOJ is sticking firmly to their ultra loose policies? Is the market expecting the Fed to be more dovish than what they potrayed?
Relative Interest Rates
Moreover, the interest rate differnetials is still very much evident and the gap is growing ever larger when the Fed is scheduled to continue their rate hikes and the terminal rate is projected to reach a minimum of 5% next year.
The greenback is now on track to its worst month in over a decade, a monthly drop of greater than 4%. There are various factors at play here with the major one being the optimism over the re-opening in China, which is now turned to mixed reactions due to fresh lockdowns at the time of writing. Other than that, upcoming economic data and Fed speech accompanied by month-end volatility.
Our preference for USDJPY is bearish below 138.700 which is where the pair is trading now. This is purely based on technical analysis- a triangle formation near key support level and the breach of the ascending trendline, though not sufficiently convincing, coupled with the existing bearish momentum, it’s a solid recipe for a follow through.
On the fundamental side of things, we are leaning towards a bullish USDJPY in the long term with the primary confluence being the interest rates differentials and a potential recovery from the prolonged decline in the US dollar.
For short term traders, now could be a prime time to hop on the setup before the bearish breakout crytalise. On the other hand, it is best for long term traders to wait for a better price, ie: a lower price to hunt for an opportunity to go long, preferably near the 134.500 support zone.
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