The continuation of the clear divergence between the policy of the Japanese Central Bank's indulgent policy and the Federal Reserve Bank, which is leading a fierce campaign of tightening to contain record inflation, will remain supportive of the bullish trend of the USD/JPY currency pair. The currency recently reached the resistance level 142.25, its highest in seven months, and settled around the level 141.30 at the time of writing the analysis.
Yesterday, US stocks fell as the recovery slowed in the second quarter as investors jittery ahead of Powell's testimony later in the day. On the other hand, treasury bond yields rose. According to trading, the S&P 500 index achieved its first two-day losing streak in four weeks, as the US stock index traded away from its highest levels in 14 months. The Nasdaq 100 ended the session with little change as technology-heavy Tesla stocks extended deeper losses. FedEx Corp. shares fell 5 percent in after-hours trading after the 2024 outlook fell short of analysts' highest estimates of weak demand.
All in all, investors caught between fear of missing out and fears of outgrowing the markets, react very quickly to exaggerated valuations and hawkish signals from the Federal Reserve. The AI craze that's been driving much of the recent gains will certainly be a theme during the collective outlook for the second quarter.
On the other hand, the course of US monetary policy is another wild card. Federal Reserve Chairman Jerome Powell will submit his semi-annual report to Congress on Wednesday. Federal Reserve policymakers kept US interest rates unchanged at their latest meeting but warned of further tightening ahead. Investors are also awaiting the results of policy meetings in Türkiye, the UK and Switzerland. The Federal Reserve's decision last week came with expectations that borrowing costs would rise by 5.6 percent in 2023, which means a quarter-point or half-point increase in the US interest rate before the end of the year. That contrasts with the market pricing in around 20 basis points of tightening in the remainder of the year.
Dollar expectations against the yen today:
- Despite the recent profit-taking sales, the general direction of the USD/JPY currency pair is still bullish.
- It surpassed the 142.00 resistance level, which will confirm the bulls' control and at the same time move the technical indicators towards strong overbought levels.
- In the event that the testimony of Jerome Powell, Governor of the US Central Bank, supports the path of tightening the bank's policy, the bulls may find the opportunity to breach stronger bullish levels, the closest to which they are currently 142.40 and 143.00, respectively.
On the other hand, if the testimony and statements come in support of a temporary halt to the US tightening policy, there may be an opportunity for a bearish correction for the currency pair. There will be no first breach of the trend without stability below the support 139.30, according to the performance on the daily chart below.
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