The odds of a US rate hike in June remain low as the latest US jobs report will give the Federal Reserve a reason to pause and suggest that the recent setback for the dollar could extend.
In the case of the USD/JPY currency pair, it was exposed to profit-taking sales that were widely expected, especially after testing the 140.93 resistance level, as Japan also hinted at the possibility of intervention to prevent further collapse of the Japanese yen in the markets. Its losses in the same trading week reached the support level of 138.43, before closing trading around the level of 139.96, which is closest to the psychological resistance level of 140.00, which supports the bulls' control.
All in all, the headline US Nonfarm Payrolls report smashed expectations at 339K vs. 180K expected, beating the upwardly revised 294K for April. This would have triggered a strong reaction on the US dollar in the past months as it indicates that the US Federal Reserve has more work to do to cool down the economy and inflation. But there are some confusing developments for investors as the household survey revealed an unexpected rise in the unemployment rate to 3.7% from 3.4% previously.
Meanwhile, wages came in softer with average hourly earnings rising 0.3% m/m in May, lower than expected by 0.4% and slowing by 0.4% in April, also indicating weakness in the labor market. Overall nothing here "shouts" about a June rate hike, and the forex market agrees: the dollar is trading flat on the day at the time of writing, as the initial surge fizzled out.
Commenting on the influencing factors. Mark Chandler, an analyst at Bannockburn, says: “The foundation’s survey showed an increase of 339,000 in US non-farm payrolls. The household survey showed a loss of 313,000 jobs (hence the jump in unemployment). So the odds of a Fed hike this month have gone up but are now back below 30%.”
In general, the US dollar fell last week, amid a combination of factors that include the resolution of the US government's financing drama and comments from a number of Federal Reserve members that the Fed should consider skipping the US interest rate hike in June in favor of moving in July. The jobs report was one important release that may have sealed the dollar's decline, but given its contradictory nature, this is unlikely.
In the near term, then, more losses could be made. Accordingly, Christoph Balz, chief economist at Commerzbank, says, “Apart from strong job creation, the data points to a slowdown in the labor market. This allows the Fed to sit firmly at the FOMC meeting on June 13/14 and pause at least on raising interest rates. The US central bank can then wait and see how things develop and, if necessary, tighten further at a later date.”
Technical analysis of the USD/JPY pair:
- In the near term and according to the performance of the hourly chart, it appears that the USD/JPY has completed an upward breach from the descending channel formation.
- This indicates a significant change in market sentiment in the short term from bearish to bullish.
- Therefore, the bulls are looking to extend the current rebound towards 140.33 or higher, to the resistance 140.83.
- On the other hand, the bears will target a potential pullback around 139.31 or below at 138.74 support.
On the long run, and according to the performance on the daily chart, it appears that the USD/JPY is trading within the formation of an ascending channel. This indicates a significant long-term bullish bias in market sentiment. Therefore, the bulls will look forward to riding the current wave of gains towards 142.29 or higher to the resistance 145.07. On the other hand, the bears will look to pounce on the long-term gains at around 137.54 or below at the support at 134.86
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