The USD/JPY currency pair has been trading higher for the third day in a row, reaching a one-week high heading into the North American session. The pair is currently trading around the 133.30 mark, up almost 0.90% for the day, with bulls now eyeing to challenge the 100-day Simple Moving Average (SMA) barrier amid broad-based US Dollar (USD) strength.
The USD Index, which tracks the Greenback against a basket of currencies, builds on last week’s recovery move from over a two-month low and gains strong follow-through traction amid expectations for further rate hikes by the Federal Reserve (Fed). Market participants are now pricing in a greater chance of a 25 basis points lift-off at the forthcoming FOMC policy meeting in May, and the bets were lifted by the mostly upbeat US monthly employment details released on Friday. This, in turn, continues to push the USD higher, which, along with dovish-sounding remarks by the new Bank of Japan (BoJ) Governor Kazuo Ueda, prompts aggressive short-covering around the USD/JPY pair.
During his inauguration speech, Ueda ruled out any major policy shift and said that they want to avoid a sudden normalization in monetary policy as it would cause a significant impact on markets. This, in turn, has weighed heavily on the Japanese Yen (JPY) and provided an additional boost to the USD/JPY pair. That being said, the risk-off impulse – as depicted by a fresh leg down in the equity markets – could lend some support to the safe-haven JPY and keep a lid on any further gains for the major, at least for the time being. In the context of concerns about a deeper global economic downturn, heightened US-China tensions over Taiwan have tempered investors’ appetite for riskier assets.
Given this backdrop, it seems prudent to wait for a sustained break through the 100-day SMA before positioning for any further appreciating move ahead of the US consumer inflation figures and the FOMC meeting minutes, which are due for release on Wednesday. Apart from this, traders will take cues from the US monthly Retail Sales figures on Friday. This will play a crucial role in influencing the near-term USD price dynamics and aid in determining the next leg of a directional move for the USD/JPY pair.
In terms of technical levels to watch, a sustained move beyond the 100-day SMA (near the 133.45-50 region) will be seen as a trigger for additional bullish momentum. This should pave the way for a move towards reclaiming the 134.00 mark, en route to the recent multi-year swing highs around the 134.50-60 region. On the flip side, any subsequent slide might now find immediate support near the 131.85-80 region, which if broken might accelerate the fall towards the 131.00 mark, coinciding with the 96.4% Fibonacci retracement level of the recent up-move from a multi-year low of 99 to the 134.58 high.
Traders should keep a close eye on these critical levels as the currency pair continues to carve out its next move. With immediate risks pointing to potential downside in the near-term, waiting for a sustained break above the 100-day SMA could provide a clearer indication of any further appreciation in the USD/JPY pair.