Investors strongly abandoned the Japanese yen again, which allowed the bulls to push the USD/JPY currency pair to move towards the 140.30 resistance level. It is stable near it at the time of writing the analysis, and ahead of a new important event for the US dollar pairs. A strong reading of inflation can confirm the possibility of another rise in the FOMC, which could lead to an upward breach in the currency pair.
US inflation slowed in May, supporting the Fed officials' argument to hold off on rate hikes this week. According to official figures, both the US consumer price index and the core consumer price index - which excludes food and energy - slowed on an annual basis, highlighting the fall in inflation since it peaked last year. At 4 percent, annual inflation is now at its lowest level since March 2021. However, the main measure of prices that the Fed monitors continued to rise at an alarming pace. The core CPI rose 0.4 percent for the third consecutive month, in line with estimates. However, the overall CPI rose 0.1 percent, supported by lower gasoline prices.
The figures come just a day before the Federal Reserve is set to decide whether to raise interest rates for the 11th consecutive meeting or pause and assess economic conditions.
The May non-farm payrolls report actually beat estimates, which means the US central bank has room to tighten if needed.
Elsewhere, the Bank of Japan reiterated its plans to keep monetary policy loose until inflation is sustainably back on target. They may repeat this rhetoric in the upcoming BoJ announcement, which may keep some negative pressure on the JPY. However, a slight shift to a less dovish tone or acknowledgment of recent developments in the Japanese economy could mean a higher JPY.
Technical analysis of the dollar pair against the yen:
- The price of the USD/JPY currency pair formed decreasing tops and rising bottoms within a symmetrical triangle pattern on the hourly chart.
- Neutrals are getting tighter, so a breakout could happen soon.
- The price is currently testing the triangle resistance, and may be considering an upward move that could lift USDJPY to the same height as the pattern.
- The triangle extends around 138.50 to 140.50, so the resulting 200 pips rally may continue.
Meanwhile, moving averages hardly provide direction guides at the moment, as the indicators oscillate to reflect sideways price action. Meanwhile, Stochastic is moving down to indicate that another test of support is underway. A break below 139.00 could confirm that the bears are in control and USDJPY could drop 200 pips. The RSI is also heading down, so the pair could follow suit while selling pressure is present.
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