USD/JPY pulls back from the monthly-high (112.14) even as data prints coming out of the U.S. instill an improved outlook for the economy, and the exchange rate may continue to consolidate ahead of the Non-Farm Payrolls (NFP) report as it snaps the series of higher highs & lows from the previous week.

USD/JPY PULLS BACK AHEAD OF NFP REPORT ON FED’S WAIT-AND-SEE GUIDANCE

The USD/JPY advance following the U.S. Gross Domestic Product (GDP) report appears to be stalling as Federal Reserve officials continue to tame bets for higher interest rates, and it seems as though the central bank will defend the wait-and-see approach at the next rate decision on March 20 as the Trump administration struggles to reach a trade deal with China.

Recent remarks from New York Fed President John Williams, a permanent voting member on the Federal Open Market Committee (FOMC), suggest the central bank will continue to alter the forward-guidance amid the ‘downturn in global growth, heightened geopolitical uncertainty, and the effects of tighter financial conditions,’ and Chairman Jerome Powell & Co. may start to taper the $50B/month in quantitative tightening (QT) over the coming months as ‘the Committee can now evaluate the appropriate timing and approach for the end of balance sheet runoff.’

However, the FOMC may have a difficult time in defending the wait-and-see approach for monetary policy as U.S. Initial Jobless Claims unexpectedly narrows to 223K from a revised 226K in the week ending February 23, with Continuing Claims highlighting a similar dynamic as the figure slips to 1755K from 1805K in the week ending February 16. The slowdown in claims for unemployment benefits bodes well for the NFP report, which is anticipated to show the U.S. economy adding another 180K in February, and a positive development may heighten the appeal of the dollar as it puts pressure on the Federal Reserve to squeeze in a rate-hike later this year.

With that said, it remains to be seen if Fed officials will adjust the Summary of Economic Projections (SEP) at the March meeting as the central bank pledges to be ‘data dependent,’ but recent price action in USD/JPY raises the risk for a larger pullback as the exchange rate snaps the series of higher highs & lows from the previous week.

USD/JPY DAILY CHART

(Click on image to enlarge)

• Near-term outlook for USD/JPY remains constructive as both price and the RSI continue to track the upward trends from earlier this year, but the correction following the currency market flash-crash appears to be sputtering amid the lack of momentum to test the Fibonacci overlap around 112.40 (61.8% retracement) to 113.00 (38.2% expansion).
• As a result, failure to hold above the 111.10 (61.8% expansion) to 111.80 (23.6% expansion) region raises the risk for a move back towards 109.40 (50% retracement) to 110.00 (78.6% expansion), which largely lines up with channel support, with the next downside region of interest coming in around 108.30 (61.8% retracement) to 108.40 (100% expansion).