On the daily chart below, we can see that the USDJPY pair has been steadily rising since the University of Michigan report showed a big jump in consumers’ long-term inflation expectations.
This was accompanied by several strong economic data in the United States which caused the market to rethink the future trajectory of its interest rates. Price is now trying to break above the resistance at 138.16. This level is the top of the ascending triangle defined by the uptrend line where the price last bounced. The upside target would be the handle at 142.00.
The Fed, while hinting at a pause in June, left the door open for another hike if the data suggested it. Well, the data did. Yesterday we had good US PMI’s with the manufacturing side contracting, but the services side showing a huge beat. The services sector currently accounts for 80% of the US economy, which could keep underlying inflation much higher than the Fed would like and thus force it to do more.
On the 4-hour chart below, we can see that the red long-period moving average is acting as dynamic support for the USD/JPY rally. This morning, price rebounded from 138.16 resistance which may now turn into support as searing UK CPI data rippled through financial markets. Of course, if inflation stays above central banks’ targets, they will be forced to do more to bring it down, but the longer it stays high, the harder it will be to bring it down later.
On the 1 hour chart below we can see that we have a mini range between 138.16 support and 138.72 resistance. This pattern also looks like an ascending triangle, so a break above the high should lead to more upside and that’s what the buyers are looking forward to.
On the other hand, sellers will need a break below the 138.16 level and the 137.44 low to start looking for a bigger downside correction with the trendline being the target. This scenario seems unlikely at the moment unless we start to see deteriorating economic data, especially with the NFP and CPI next month.
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