Chart of The Day USDJPY

USDJPY Probable Price Path & Potential Reversal Zone

It will be a bumpier ride for USDJPY going forward: while US inflation will head higher in Q2 and continue to support UST yields and the exchange rate, the rise in US inflation will likely prove transitory and in-line with the FOMC's view, which will cap USDJPY. The exchange rate has some broad underlying support beyond the risk of higher US inflation threatening to force the FOMC's hand into tapering its asset purchases. Indeed, President Joe Biden’s USD1.9trn (9% of GDP) fiscal stimulus will further accelerate the US’s economic growth. Higher vaccination rates in the US than almost all other G10 countries (except the UK) is also a plus for the USD.

The BoJ also remains committed to its YCC. BoJ Governor, Haruhiko Kuroda, recently said that he does not think it necessary to expand the BoJ’s long-term YCC band. The 10Y JGB yield has tested as high 0.18% during the recent global bond selloff and close to the upper edge of the BoJ's +/-20bp variation around its target of 0.0%. So, the FOMC remains in contrast to the BoJ (and many other central banks) as it continues to take a sanguine approach to the move higher in its long-term government bond yields. This dynamic will keep upward pressure on the USDJPYin the absence of US inflation surprising to the downside.

From a technical and trading perspective, the USDJPY looks poised to make an initial assault on monthly projected range resistance, the internal projected trend channel resistance and the weekly descending trendline resistance around 109 as this area caps an initial test look for a three wave corrective pattern to test 107.50/30 as support. As fresh demand enters the market bulls will look to re-engage long positions targeting a test of offers and stops through the 2020 high of 109.85, before a more meaningful corrective phase may develop.

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