USD/JPY Hits Key Resistance Ahead of U.S. Inflation Data

10/10/2024

Market Overview

On Thursday, USD/JPY is facing increased volatility as traders brace for key U.S. inflation data. The Japanese yen strengthened earlier in the week due to a rise in the Producer Price Index (PPI), alongside signals from the Bank of Japan (BoJ) hinting at potential future rate hikes. Additionally, the latest Jibun Bank Services PMI data, showing slight improvement, fueled hopes for a strengthening Japanese economy. This speculation has increased expectations that the BoJ might consider tightening its monetary policy sooner, thereby reducing the rate differential with the U.S. dollar.

However, market participants are keeping an eye on today’s U.S. Consumer Price Index (CPI) report, which could be a significant driver for USD/JPY and may introduce considerable volatility depending on how inflation figures turn out. A strong CPI reading would bolster the case for the Federal Reserve to maintain its hawkish stance, thereby supporting the dollar, while weaker data could lead to a pullback in the pair.

Technical Analysis

The USD/JPY pair is currently hovering around the 149.000 level, with the chart structure showing signs of potential continuation to the upside. The pair has recently completed an inverse head and shoulders pattern, and the break above the neckline of this formation suggests the possibility of further gains. The Weighted Moving Average (WMA) is also trending upward, providing additional support for the bullish sentiment.

The pair remains above the key support levels of 148.233 and 147.337, with near-term upside targets set at 150.235 and 151.660. The Relative Strength Index (RSI) stands above the 60 level, indicating strong bullish momentum, and the MACD remains positive, further confirming the likelihood of continued upward movement.

If the pair manages to hold above the immediate resistance at 149.615, the next key resistance level at 150.235 will become a significant battleground. A successful break above this level would clear the path towards 150.919 and potentially further gains to 151.660. The continuation of bullish momentum will depend largely on the reaction to U.S. inflation data later today.

Alternative Scenario

On the downside, failure to break through the 150.235 resistance could lead to a retracement in the pair. A reversal below 148.233 would be an early indication of weakening bullish momentum, potentially triggering a deeper pullback towards the 147.337 support level. If this support fails to hold, it could lead to a more extended downside correction, challenging the validity of the recently established bullish reversal pattern.

In this scenario, traders should closely watch the support zone to assess whether USD/JPY will find a stable base or continue to move lower.

Technical Indicators Summary

RSI: Currently above 60, indicating strong bullish momentum.

MACD: Positive, reinforcing the bullish outlook.

WMA: Trending upwards, acting as dynamic support and confirming the strength of the ongoing bullish movement.

Key Levels Overview

Resistance Levels:

Resistance 1: 149.615
Resistance 2: 150.235
Resistance 3: 150.919
Resistance 4: 151.660

Current Price: 149.128

Support Levels:

Support 1: 148.233
Support 2: 147.337

Key Events to Watch

Several events could significantly impact the USD/JPY pair throughout the day. A scheduled speech by a Federal Open Market Committee (FOMC) member could directly influence the value of the U.S. dollar, potentially triggering increased volatility. Additionally, the release of the Consumer Price Index (CPI) for September is the key focus for today. If CPI readings exceed market expectations, it could strengthen the dollar, potentially propelling USD/JPY higher. Conversely, a disappointing figure would weigh on the dollar, favoring the yen.

Also, remarks from other Fed officials are expected later in the day, which may provide insights into future monetary policy direction and could shape expectations for the USD moving forward.

Conclusion

USD/JPY is currently attempting to break key resistance levels as market focus shifts to U.S. inflation data. With the completion of a bullish inverse head and shoulders pattern, the pair is positioned to extend its rally if it manages to clear immediate resistance at 149.615 and advance towards 150.235 and 151.660. However, a failure to maintain this momentum would place critical support levels at 148.233 and 147.337 in focus, potentially leading to a shift in market dynamics.

Traders should closely monitor today’s U.S. CPI release and any subsequent comments from Fed officials. These data points will be crucial in determining whether the pair can sustain its recent upward momentum or if it will undergo a broader retracement.