Throughout this week's trading, the price of the USD/JPY currency pair did not find any momentum to stop the downward retracement path. Prices pushed it towards the support level 134.52, and settled around 135.75 at the time of writing the analysis. The US dollar gave up many of its gains, in light of the US Federal Reserve's policy shift to calm the tightening, after US inflation numbers fell less than expected.
The US dollar was boosted after the Federal Reserve raised US interest rates by 50 basis points and raised its forecast for where it expects interest rates to stabilize at the end of the hiking cycle in 2023. However, the gains were quickly given up as Bank Governor Jerome Powell could not shake the market's conviction that the Fed was at the end game. A move of 50 basis points was expected, but the rise in expectations was stronger than expected and the dollar rose in the minutes after the decision was issued, confirming a “hawkish” tinge to the result.
Updated projections show members of the Federal Open Market Committee (FOMC) - the interest rate-setting body - now see the final comfort point for interest rates at 5.1% in 2023, up from 4.6% in September. The market reaction was by no means great, but stocks nonetheless broke off their highs and headed into the red.
Another potential surprise to the markets was the scope of the Fed's inflation outlook upgrades (3.5% vs. 3.1% in September) which in itself is a signal that more increases are needed. Growth forecasts have also been lowered as the impact of higher rates and persistent inflation has led to a recalculation of the future path of the economy. Two officials now see negative GDP growth in 2023 as the overall growth forecast has been cut by 0.5%. However, the market quickly dismissed these developments and the dollar returned to pre-FOMC levels.
Overall, the dollar is still in a short-term downtrend that extended after data showed that US inflation has subsided for the second month in a row, indicating that it has peaked. This has allowed the Federal Reserve to consider slowing the pace of interest rate hikes. It was this cycle of price hikes that pushed the dollar higher in 2022, and thus expectations that the cycle will end in the near term have challenged this rally.
Technical forecasts for the US dollar against the Japanese yen today:
- According to the performance on the daily chart below, the general trend of the USD/JPY currency pair is still bearish.
- The recent move towards the support level 134.20 moves the technical indicators towards oversold levels so far.
- I still prefer buying the dollar/yen from every downside level and the nearest support levels.
- The currency pair is currently at 134.90 and 133.80 respectively.
On the other hand, there will be a need to move towards the psychological resistance 140.00 again, to confirm the return of bulls' control over the trend.
Today, the USD/JPY currency pair will be affected by investors' appetite for risk or not, as well as the reaction from the results of US economic data, led by the retail sales figures.
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