For four trading sessions in a row, the price of the USD/JPY currency pair is moving amid bullish momentum. It is stable on its impact around the resistance level 115.62 as the currency pair may maintain its bullish outlook until the US inflation figures are announced tomorrow. The US inflation and jobs numbers have a strong and direct impact on the expectations of the future US interest rate hike by the Federal Reserve.
The US dollar tailwind is expected to be reinforced by a leading US-based investment bank, a view if correct which will create headwinds for the Euro and Sterling. In this regard, Bank of America BofA Merrill Lynch says that the market has lost what matters to the dollar: that the Fed will win the "race to the top" in terms of raising interest rates.
“The US dollar is no longer widely seen as having a strong monetary policy behind it," says Ben Randol, forex analyst at Bank of America. We disagree, less with the drive to re-price global central banks (CBs) higher, and more as markets fail to maintain the Fed's leadership."
The results come amid a mixed start to 2022 for the dollar, which saw a third of a percent decline against the euro and 0.12 percent against the pound. The US dollar was bought after the Federal Reserve on January 26 gave an advance warning that US interest rates may rise in March while also indicating that further increases could be announced and at a faster pace than seen during the last monetary tightening cycle.
Detailing why the Fed is moving so quickly on interest rates, Fed Chairman Jerome Powell said the US economy is in a very different place than it was when we started raising rates in 2015.
Specifically, the economy is now much stronger, the labor market is now much stronger, and inflation is above the 2% target.
The bullish momentum of the US dollar faded somewhat as it became clear that the Fed was not the only central bank preparing to tighten policy, as both the European Central Bank and the Bank of England in February detailed the need to tighten monetary policy in light of rising inflation.
However, Randol says it is US inflation that shows signs of persisting enough to justify a higher "final" interest rate, that is, the rate at which the cycle ends, and then elsewhere. Accordingly, the analyst says, “Other central banks, notably the European Central Bank and the Bank of England, appear to be pricing in exorbitant, if not downright exaggerated, compared to Bank of America expectations.”
For the dollar, this points to further appreciation against the EUR and GBP.
“For now at least, the United States appears exceptional in having the largest price pressures related to production capacity in the G10,” Randol added, “As long as the Fed’s response to real bullish inflation risks in the United States remains substandard, We buy the US dollar on dips.” Bank of America has forecasts for EUR/USD of 1.10 in 2022, 1.15 next year and 1.20 (lower end of the long-term equilibrium range) in 2024. GBP/USD is expected to reach 1.24 in 2022 and 1.31 in 2023.
According to the technical analysis of the pair: There is no change in my technical view, as the 115.00 resistance still supports the upward trend of the USD/JPY currency pair. The bulls’ dominance needs more momentum and this may happen if the currency pair moves towards the resistance levels 115.85 and 116.20 and 117.00, respectively. On the other hand, and according to the performance on the daily chart, the currency pair will give up its bullish momentum in case it moves towards the 113.60 support level, which is moving the bears strongly downwards. The performance of the currency pair may remain in narrow ranges until the announcement of the most prominent US inflation figures for the US dollar pairs for this week.
