USD/JPY Bulls Target 140 on Hawkish Fed and US Debt Ceiling

It is a busy start to the day for the USD/JPY. Japanese inflation numbers for April will draw attention this morning.

Economic indicators have sent mixed signals this week. While GDP numbers for Q1 impressed, trade data disappointed, with a fall in exports to China reflecting the macroeconomic environment across the region.

However, hotter-than-expected inflation numbers would give the Bank of Japan a reason to discuss ultra-loose monetary policy at the next meeting. Economists forecast the annual core inflation rate to accelerate from 3.1% to 3.4%, while economists project headline inflation to soften from 3.2% to 2.5%.

Later this morning, the Tertiary Industry Activity Index will also be in focus. However, we don’t expect the numbers to move the dial.

Beyond the economic calendar, investors will respond further to overnight US debt ceiling news.

USD/JPY Price Action

This morning, the USD/JPY was down 0.04% to 138.644. A mixed start to the day saw the USD/JPY rise to an early high of 138.723 before falling to a low of 138.612.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to avoid the 138.246 pivot to target the First Major Resistance Level (R1) at 139.207. A move through the Thursday high of 138.747 would signal a bullish USD/JPY session. However, hawkish Fed chatter and debt ceiling news must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 139.707. The Third Major Resistance Level (R3) sits at 141.168.

A fall through the pivot would bring the First Major Support Level (S1) at 137.746 into play. However, barring a risk-off fueled sell-off, the USD/JPY pair should avoid sub-137.5 and the Second Major Support Level (S2) at 136.785. The Third Major Support Level (S3) sits at 135.324.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The USD/JPY sits above the 50-day EMA (136.320). The 50-day pulled further away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A USD/JPY hold above the Major Support Levels and 50-day EMA (136.320) would support a breakout from R1 (139.207) to target R2 (139.707). However, a fall through the S1 (137.746) would bring S2 (136.785) and the 50-day EMA (136.320) into view. A USD/JPY fall through the 50-day EMA would send a bearish signal.

The US Session

Looking ahead to the US session, it is a quiet day on the US economic calendar. There are no US economic indicators for investors to consider. The lack of stats will leave the USD/JPY in the hands of market risk sentiment and, importantly, Fed chatter.

FOMC members Williams and Bowman will set the stage for Fed Chair Powell to wrap up the week. The Fed Chair has caught investors by surprise on numerous occasions. Sticky inflation and very tight labor market conditions could force Powell to discuss the possibility of a June interest rate hike.