In most of last week's trading, the price of the USD/JPY currency pair was in an upward retracement path. As a result of which it succeeded in moving towards the resistance level 134.77, before it was exposed to quick profit-taking operations after the announcement of the US job numbers. Accordingly, it closed the week's trading around level 132.10.
Despite this, the US dollar will remain the strongest, as expectations of raising US interest rates still provide a strong impetus for the US currency against the rest of the other major currencies, especially against the Japanese yen. The Bank of Japan takes the first steps to tighten, but it will not be as strong as the path of raising US interest rates, and therefore I still prefer to buy USD/JPY from each downward level.
Sticking with existing plans
The US dollar pared some of its recent gains after economic data showed that wage growth in the US was weaker than expected in December and job creation continued to trend downward. The US Nonfarm Payrolls (NFP) report for December showed that 223K jobs were added, down from 256K jobs in November. However, the number was higher than forecasts at 200K, providing an upside surprise that is usually surprisingly positive for the dollar which has rallied this week amid a series of other labor market indicators pointing to a still strong economy.
In fact, the US unemployment rate unexpectedly fell to 3.5% from 3.6% in November, defying expectations for a 3.7% reading. However, the non-farm payrolls report was not strong enough to break the now-established trend of lower monthly increases in jobs gains, so the Fed is likely to stick with existing plans to raise interest rates several times before stopping.
Average hourly earnings rose 4.6% in the year to December, well below the 5% the market was looking for and a slowdown from 4.8% in November. The wage numbers are important because they will tell the Fed that fears of an inflationary spiral in wage prices are now unlikely to materialize.
Ahead of the US employment report, the FOMC meeting minutes boosted the US dollar, as the Fed indicated room for further rate hikes in the coming months. Fed Chair Powell even hinted that they are not looking to lower borrowing costs anytime soon. However, the employment component of the ISM Manufacturing PMI, the US JOLTS employment number, and the ADP Non-Farm Payroll Change report all came in better than expected. This could mean another strong showing of the official jobs report, confirming that the Fed has scope to continue tightening monetary policy in the near term.
Meanwhile, the Bank of Japan announced unscheduled bond purchases earlier this week, reminding investors that economic problems are very much present in Japan.
Technical expectations for the dollar pair against the yen today:
- USD/JPY may be in the process of reversing from the short-term selling, as the pair closed above the bearish trend line visible on the hourly chart.
- It also appears that the price is forming a complex double bottom pattern and closing above the 100 SMA.
- A break above the neckline around the 135.00 resistance could be enough to confirm that a rally is on the way.
- However, the 100 SMA is still below the 200 SMA to indicate that the general trend is down and there is a chance to resume selling.
Stochastic is signaling overbought or exhausted levels among the buyers, so a turn lower would confirm that the sellers are in control. The RSI has a bit more room to run before hitting the overbought territory, so there could be some bullish pressure remaining.
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