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USD/JPY Currency Outlook: US Inflation Data to Test the Yen’s Resolve

USD/JPY, Japanese Government Bonds, News and Analysis

  • BoJ’s yield curve control coming under pressure despite unlimited purchases
  • USD/JPY finding support at 121.20 – key technical levels considered
  • The Yen’s recent resilience is likely to be tested later this week with US PCE and NFP data due on Thursday and Friday respectively
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The Japanese Yen has retraced a fair amount since its drastic depreciation beginning on March the 11th where we saw a topside breakout from the ascending triangle. USD/JPY has subsequently turned lower, largely due to a softer dollar and positive reports regarding Russia-Ukraine peace talks which lessened the greenback’s safe-haven appeal.

The BoJ’s Uphill Battle with Yield Curve Control

The Bank of Japan (BoJ) entered a third day of large-scale bond buying, offering to buy more than 2 trillion yen’s worth of Japanese Government Bonds (JGBs), over and above the unlimited purchases of 10-year JGBs at a fixed rate of 0.25%.

The 10-year yield is something that has come under scrutiny lately as global rising yields have taken the rate towards, and slightly above, the 0.25% cap. On Wednesday however, we did see the effects of the BoJ’s efforts as the 10-year yield turned a fair bit lower.

The BoJ is determined to keep interest rates low, in line with its accommodative monetary policy stance to support the local economy. BoJ Governor Kuroda recently noted the Yen’s depreciation and general volatility but insists that the benefits of the depreciation outweigh the negatives.

Japanese 10 Year Government Bond Yield

USD/JPY Currency Outlook: US Inflation Data to Test the Yen’s Resolve

Source: TradingView, prepared by Richard Snow

USD/JPY Key Technical Levels

USD/JPY quickly retreated from the 125 level and after two days in the red appears to have found the first level of support at the prior lower wick of 121.20. A decisive move lower resulting in a daily close below 121.20 opens the door to the 120 psychological level.

However, the bullish continuation theme could be supported if we are to see hotter PCE inflation and further improvements in the already strong US labor market. Aggressive US rate hike bets also favor dollar strength, particularly off recent lower levels seen in the dollar index (DXY) – a general benchmark for USD performance. A close above 121.85 leaves the door open for a retest of the 124.15 and 125 levels.

USD/JPY Daily Chart

USD/JPY Currency Outlook: US Inflation Data to Test the Yen’s Resolve

Source: TradingView, prepared by Richard Snow

Major Risk Events Ahead

With Japanese data rather light, the focus shifts to the US regarding the PCE Price Index (the Fed’s referred measure of inflation) and the non-farm payroll data with and additional 490k jobs to be added in March. With inflation trending higher and a really strong US labour market, better than expected figures would likely boost the dollar and USD/JPY, especially off the lower levels we have seen over the last 48 hours.

USD/JPY Currency Outlook: US Inflation Data to Test the Yen’s Resolve

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX