The Japanese Yen (JPY) extended its decline on Friday following the release of subdued National Consumer Price Index (CPI) data by the Statistics Bureau of Japan. The annual inflation rate dipped to 2.5% in April from 2.7% in the preceding month, marking the second consecutive month of moderation but still hovering above the Bank of Japan’s (BoJ) 2% target. This persistent inflationary pressure keeps the central bank under scrutiny to contemplate further policy tightening measures.
The Bank of Japan has reiterated the importance of a sustained, stable attainment of its 2% price target, coupled with robust wage growth, for policy normalization. Meanwhile, market participants anticipate that the prolonged weakness of the JPY may prompt the BOJ to expedite its next interest rate hike to mitigate the impact on the cost of living, as reported by Reuters.
US Dollar (USD) Gains Momentum Amid Hawkish Fed Sentiment
The US Dollar (USD) strengthened on the back of hawkish sentiment surrounding the Federal Reserve (Fed), which aims to uphold higher policy rates for an extended duration. This sentiment received a boost from the upbeat Purchasing Managers Index (PMI) data from the United States (US) released on Thursday. Investors are closely monitoring the Michigan Consumer Sentiment Index on Friday to glean insights into consumer sentiment regarding financial and income situations in the United States.
Market Highlights:
Japan’s Core CPI (YoY): Excluding fresh food but encompassing fuel costs, rose 2.2% in April as anticipated, marking a second consecutive monthly slowdown compared to March’s 2.6% reading.
S&P Global US Composite PMI: Surged to 54.4 in May from 51.3 in April, reaching its highest level since April 2022 and surpassing market forecasts of 51.1. The Service PMI recorded robust output growth, while the Manufacturing PMI edged up.
Probability of Fed Rate Cut: According to the CME FedWatch Tool, the likelihood of the Federal Reserve implementing a 25 basis-point rate cut in September decreased to 46.6% from the previous day’s 49.4%.
Bank of Japan Announcement: The BoJ maintained the amount of Japanese government bonds (JGB) unchanged compared to the previous operation, after trimming the amount of 5-10 year bonds bought in a scheduled operation over a month ago.
Geopolitical Tensions: Escalation observed following Lai Ching-te’s assumption of office as Taiwan’s new president, with Chinese state media reporting increased military activities in the Taiwan Strait and surrounding areas.
Technical Analysis: USD/JPY Pair Insights
The USD/JPY pair hovers around 157.10 on Friday. A rising wedge pattern on the daily chart hints at a potential bearish reversal as the pair nears the wedge’s apex. However, the 14-day Relative Strength Index (RSI) remains above 50, indicating sustained bullish momentum. Any decline below this level could signal a shift in momentum.
The pair might encounter resistance near the upper boundary of the rising wedge around 157.20, with a potential upward trajectory toward the recent high of 160.32 upon breaking above this level.
On the downside, immediate support is anticipated around the nine-day Exponential Moving Average (EMA) at 156.33, followed by the lower boundary of the rising wedge and a psychological support level at 156.00. A breach below this level could exert downward pressure on the USD/JPY pair, potentially targeting the throwback support at 151.86.
