The strong and sharp gains of the USD/JPY currency pair, which moved all technical indicators on all timeframes towards strong overbought levels, may be followed by profit-taking sales at any time. This is what actually happened for the second week in a row. Starting from the resistance level at 145.06, the highest level for the currency pair in eight months, with losses extending towards the support level at 141.41, around which the currency pair is stable at the time of writing the analysis.
US central bank policy future
Federal Reserve Vice Chairman of Oversight Michael Barr said that the US central bank still has more work to do to raise interest rates to a level that will contain inflation. "Inflation is still very high," Barr told the bipartisan Policy Center meeting on Monday. He added, "We've made a lot of progress on monetary policy, and the work we need to do, over the past year."
“I would say we are close, but we still have a little bit of work to do,” he added.
The Fed kept US interest rates steady in June after raising them for 10 consecutive meetings to a range of 5% to 5.25%. The majority of policymakers expect prices to increase by another half percentage point by the end of the year, according to projections released after the June meeting. "As we get closer and closer to what we think is a sufficiently restrictive level, that's part of positioning ourselves so that we can try to get to that target level in a cautious way," the official said of June's decision.
Overall, the Fed is trying to further quell inflation, which has fallen from last year's peak but is still far from the US central bank's 2% target. It also allows time for its aggressive policy to work through the economy and assess how recent banking turmoil has affected credit conditions. US job growth slowed in June while wage growth remained flat. A Labor Department report on Friday showed that US non-farm payrolls increased by 209,000 - the smallest advance since the end of 2020 - after downward revisions in the previous two months. Average hourly earnings rose 4.4% from the previous year.
On the other hand, US inflation is expected to slow sharply last month, on the back of lower gasoline prices. Consumer prices probably rose 3.1% in June from a year earlier, down from 4% in May, according to the median forecast of economists polled by Bloomberg. Excluding the cost of food and energy, prices are expected to rise 5% year-on-year, down from 5.3% in May. The Labor Department will release the figures on July 12.
Forecasts of the US dollar against the Japanese yen:
- According to the performance on the daily chart below, the general bullish trend of the USD/JPY currency pair has been broken.
- The move towards and below the psychological support level of 140.00 will be important to confirm the shift.
- The return of the currency pair to the vicinity of resistance 143.90 will be important for the strong bulls to rule again.
I expect the currency pair to remain in its last range until the markets react to the announcement of US inflation figures, which will have a strong and direct reaction on the future of raising US interest rates, factoring in the US dollar's recent record gains.
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