The US dollar saw a furious recovery last week, drawing fuel from its safe-haven qualities as risk sentiment deteriorated and from some survey data that cast doubt on the popular notion that the Fed will soon cut interest rates. This allowed the bulls to push the price of the USD/JPY currency pair, to move with gains towards the 136.32 resistance level, which is stable near it at the time of writing the analysis.
Long-term US inflation expectations rose in a Michigan consumer survey in May, reaching their highest levels in more than a decade, and underscoring the risk that the Fed hasn't undoed the inflation dragon yet. All in all, the dollar rallied in the wake of this data set on Friday while stock markets crawled lower, as investors began to flirt with the idea that there could be another Fed rate hike in June.
Although the implied market probability of a rate hike in June stands at just 12%, this figure may underestimate its true probability in the eyes of FOMC officials. Fed Governor Bowman gave a speech last week where she stressed that the latest CPI and employment reports did not provide consistent evidence that inflation is on a downward trajectory, suggesting that "additional policy tightening would likely be appropriate."
Investors shrugged off the hawkish rhetoric from Bowman, but a series of Fed speakers are on the schedule this week, and if they echo a similar tone, the potential for a June rate hike could continue to rise, helping the dollar extend its gains.
With the Fed contemplating raising US interest rates again while the Bank of Japan insists it is too early to follow suit, the Japanese yen is back under pressure, choking under the weight of widening interest rate differentials. However, there is still a glimmer of hope for the yen in the form of inflation data released on Friday. Japanese inflationary pressures are likely to continue rising in April, reflecting the outlook for Tokyo CPI. If this trend is reflected in national data, speculation about the Bank of Japan's tightening this year may give rise to a second wind, bringing life back to the yen.
In the field of energy, oil prices closed down on Friday for the fourth consecutive week. Despite the news that from June onwards, the US government may turn into a net buyer of crude to replenish the Strategic Petroleum Reserve, oil prices continue to be affected, likely due to demand concerns as the Chinese reopening boom appears to be fading.
Finally in Turkey, with almost all votes counted, no candidate has been able to cross the 50% threshold, which means there will be a second round of elections in two weeks. The Turkish lira fell to a new record high against the US dollar in the aftermath, as President Erdogan's surprisingly strong performance raises the odds that artificially low interest rates will be a continuing phenomenon going forward.
Forecasts of the US dollar against the Japanese yen today:
- According to the performance on the daily chart below, the bulls regained control over the performance of the price of the US dollar currency pair against the Japanese yen USD/JPY.
- The bulls may succeed in moving the currency pair towards the psychological resistance level 140.00 if the currency pair stabilizes above the resistance 138.20.
- Support 133.30 is important for the bears to firmly control the trend.
- I still prefer to buy the currency pair from every downward level.
