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USDJPY On the Up

It’s been an interesting and action-packed week for traders with plenty of developments and plenty of nice moves to get involved with. Chatting with traders ahead of the weekend, it seems the big move capturing attention in FX is the fresh strength we’ve seen in USD this week, particularly against JPY. USDJPY has rallied almost 3% this week, breaking out above a key resistance level, and looks poised to continue higher into next week. So, let’s take a look at what caused the move and, as ever, if you caught it. Well done! If you missed it? There’s always next week.
 

What Caused the Move?

Shifting USD View

The big driver behind the move this week has been the shift in the USD outlook in response to recent US data. On the back of a bumper set of US January labor market data, Tuesday’s CPI print was being closely watched. With monthly inflation seen jumping back up to 0.5% from -0.1% prior, fresh emphasis has been put on the potential for the Fed to either step back up the pace of tightening or continue tightening this year for longer than expected.

This narrative gained further traction across the week as US retail sales and PPI both blew forecasts out of the water, highlighting strength in the US economy. On the back of this recent data, we heard several Fed members this week (voting and non-voting) speaking in favor of further tightening (including the potential for a larger hike next month).
 

March FOMC in Focus

With the US economy showing resilience in the face of the Fed’s tightening campaign, the view now is that the Fed has room to either be more aggressive with hikes or hike for longer. January CPI in particular shows that high inflation in the US is still a big issue and on the back of data and Fed comments this week, pricing for a larger .5% hike in March has jumped to around 20% from around 10% prior.
 

JPY Weaker on BOJ Uncertainty

The other side of this story has been the weakness we’ve seen in JPY on the back of Kazuo Ueda getting the nod to replace Kuroda as head of the BOJ in April. While Ueda is not known to be particularly dovish or hawkish, recent comments about the dangers of premature tightening have fuelled some dovish speculation which is keeping JPY pressured for now. Looking ahead, while the current USD narrative continues, the pair look likely to continue higher. Next week’s FOMC minutes are likely to add to hawkish expectations for March keeping USDJPY underpinned in the near term.
 

Technical Views

USDJPY

(Click on image to enlarge)

The rally in USDJPY off the lows has seen the pair breaking our above the bearish trend line from last year’s highs and above the 132.91 level. This is a key pivot point for the pair and while above here, the focus is on a continuation higher towards 139.33, in line with bullish momentum studies forecasts.  

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