The USD/JPY pair continues its striking rally, a trend that was established last week. The pair has been rising for five sessions in a row, and its ascend seems to be far from over. Yesterday's remarks by the Federal Reserve Chairman and his Japanese counterpart have set the stage for further growth. So, what exactly did Jerome Powell and Kazuo Ueda say?
What did Powell say?
The main event of the past Wednesday that currency traders were watching closely was the annual conference of the European Central Bank held in the Portuguese city of Sintra.
Speaking at a panel discussion dedicated to the monetary policy of the world's leading central banks, the head of the Federal Reserve unexpectedly took a more hawkish tone than last week when he discussed monetary policy prospects in the US Congress.
Jerome Powell stated that he considers two more rate hikes this year and did not rule out the possibility of tightening at the next central bank meeting scheduled for July 25-26.
Moreover, in Sintra, the head of the US central bank shared his inflation forecast and expressed concern that US inflation could remain above the Fed's target level of 2% until 2025.
Analysts believe that such forecasts indicate the regulator's intention to maintain high interest rates for as long as possible.
Yesterday's comments by J. Powell significantly increased market expectations regarding a July rate hike by 25 basis points. Futures traders now put the odds of such a move at nearly 82% compared to 77% the day before.
The strengthening hawkish sentiment gave the greenback another boost. At the end of Wednesday's trading, the DXY index rose by 0.4% against the basket of major currencies to 102.870.
One of the biggest losers in the currency market yesterday was the Japanese yen, which reached a new 7-month low against USD at 144.62.
Apart from Powell's hawkish statements, additional pressure on JPY came from the dovish speech of the Bank of Japan's chairman, who also spoke at the ECB forum.
What did Ueda say?
The new head of the BOJ, like his predecessor Haruhiko Kuroda, now appears to be a clear outlier among other central bank heads.
While Jerome Powell, Christine Lagarde, and Andrew Bailey expressed a hawkish rhetoric yesterday, the Japanese governor once again affirmed his commitment to the ultra-loose policy.
At the conference in Sintra, Kazuo Ueda reiterated that the Bank of Japan still has a considerable distance to go before achieving a sustainable 2% inflation rate, accompanied by substantial wage growth.
"We expect inflation to slow down for a while due to the diminishing effect of past import price hikes, before picking up again in 2024. However, we do not have full confidence that it will rise, and we need solid grounds for a hawkish turn," said the head of the Japanese central bank.
When asked to comment on the current devaluation of the yen, Ueda responded that not only the Bank of Japan's monetary position influences the currency rate but also the strict policies of his three colleagues: the Federal Reserve, the European Central Bank, and the Bank of England.
"The fact that Ueda considers the policies of other central banks a key factor in the yen's decline opens the door for further weakening of the Japanese currency," said analyst Eric Bregar.
Since March last year, when the Federal Reserve started its fight against high inflation by tightening its monetary policy, the yen has fallen by 11.5% against the US dollar. Many analysts forecast that the USD/JPY pair will maintain its upward trend in the near future.
A strong spike in the pair's volatility is expected in July if the US central bank resumes rate hikes while the BOJ does not take any steps in the hawkish direction.
Short-term forecast for USD/JP
The next significant trigger that could provoke another major rally is tomorrow's publication of the May data on the Personal Consumption Expenditures (PCE) price index in the US.
Economists anticipate a slowdown in headline inflation to 3.8% from 4.4%, primarily due to declining gasoline prices. However, they believe that core inflation, which excludes food and energy expenses and which US policymakers consider more indicative of the fundamental trend, will remain unchanged at 4.7%.
Persistent price growth in the US consumer sector may further strengthen the view that the Federal Reserve will once again tighten monetary conditions in July. This should provide substantial support for the dollar in all directions, including against the yen.
The primary strategic target for the buyers of the USD/JPY pair is the key level of 145. Some analysts refer to this level as a red line, upon reaching which the Japanese government may intervene in the market to strengthen the yen.
Fears of intervention serve as a significant deterrent for dollar bulls. However, a strong trigger in the form of higher US inflation data could tip the scales in favor of a bullish attitude, and then the rate is likely to hit a new high.
From a technical point of view, USD/JPY currently appears overbought. However, the Relative Strength Index (RSI) is still far from extreme values close to 80, so there is a chance for further growth.
If the pair rises above 145.00, the next resistance will be the daily low of October 27 at 145.10. Breaking this level would expose the psychologically significant threshold of 146.00, followed by the daily high of November 10 at 146.59.
Conversely, if the USD/JPY pair reverses, the next support will be at 144.00. Breaking below this level will open a quick path to the daily low of June 28 at 143.73, followed by the daily high of November 22 at 142.24.
