Last week's trading was in general dominated by the bulls over the performance of the USD/JPY currency pair, with gains that reached the resistance level 135.13. In the last trading session it retreated to the support level 133.55 before closing trading stable around the level of 134.12. This performance will await a bundle of economic data and influential events that will determine fate. This was led by the announcement of the US economic growth rate, the US central bank's preferred inflation reading, and then the policy decisions of the Japanese central bank at the first meeting of the new bank governor.
Overall, the Japanese currency may have attracted safe-haven flows amid concerns about the state of the US economy, but it may also have received a boost after Japanese inflation data showed that month-on-month CPI rebounded to 0.4% from -0.6%. Expectations had been for a lower recovery, to 0.1%. This may have raised questions about whether inflation in Japan can continue its rapid deceleration going forward, spurring market expectations that the Bank of Japan may need to proceed with more normalization steps soon.
The BoJ will meet this week, but since this will be the first meeting with Ueda at the helm, there may not be any policy changes. Officials may decide to wait a few months.
On the other hand, all three major indices fell in Wall Street markets, after disappointing earnings results from Tesla and AT&T. Shares of the electric car maker fell nearly 10% after the company reported its lowest gross margin in two years, as CEO Elon Musk said they would continue to cut prices to raise demand. That sparked fears of a potential price war, which hurt the stocks of other automakers as well.
AT&T shares fell more than 10% as the company missed estimates for revenue and free cash flow.
Concerns about the performance of the US economy may continue to weigh on stocks, but it is still unwise to call for a bearish outlook for the long term as expectations of lower interest rates in the US at the end of the year may allow some investors to stay in the game. The S&P 500 appears to be struggling to clear the 4150 ceiling, but with the following evidence that interest rates may start to fall sooner rather than later, the index may gather the necessary momentum to overcome this hurdle. The general outlook for the index may look bleak upon a clear decline below 3800.
Technical analysis of the currency pair:
- The price of the USD/JPY currency pair formed higher lows and higher highs on its four-hour time frame, with the bullish channel continuing since late March.
- The price is pulling back from resistance and it looks like another drop to support is set.
- The Fibonacci retracement tool is showing nearby support levels that may attract buying interest.
- The pair is already testing the 38.2% level, which lines up with the mid-channel area near the 134.00 handle.
The biggest correction might reach the 50% level near the minor psychological mark 133.50, or 61.8% Fibonacci retracement, which is closest to the channel support, at the main psychological support 133.00. If any of these are able to keep losses in check, USD/JPY could resume the climb to the swing high of 135.12 or higher.
Stochastic is still moving lower to show that there is some bearish pressure, but the oscillator is already falling near the oversold area to reflect exhaustion. A shift to the upside may indicate a return of bullish momentum. The RSI has more room to slide before reaching the oversold zone, so the correction may continue until the oscillator indicates sellers are exhausted. The 100 SMA is trying to cross above the 200 SMA as well, indicating that the trend is turning in favor of the bulls. These moving averages align with 61.8% Fibonacci to add to its strength as a floor.
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