US rates pullback, JPY jumps as focus shifts to the Fed

USD/JPY, Federal Reserve Talking Points:

• Tomorrow brings the May FOMC rate decision but before we get there, we also see the Services PMI print in the morning. And then on Thursday, the European Central Bank moves into the spotlight for their rate decision, and this is followed by the Friday release of Non-farm Payrolls (NFP) and Canadian jobs numbers, all of which can keep risk trends on the move.
• USD/JPY put in a strong push from a bull flag formation last week after the first BoJ meeting hosted by Kazuo Ueda, which also helped EUR/JPY to jump to a 14-year high as GBP/JPY tested a fresh seven-year high.
• I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.

USD/JPY is pulling back from a fresh breakout today. The pair put in a strong topside move last week after the Bank of Japan rate decision on Thursday night/Friday morning, and that led to a breakout from a bull flag formation in USD/JPY. As I had looked at in US Dollar Price Action Setups coming into this week, there wasn’t any substantial shifts from the Bank of Japan’s statement and that may just be what did it, as markets were starting to gear up for some element of change as the bank has ushered in new leadership as Core CPI remains above 3%. But in Kazuo Ueda’s first meeting atop the bank, he soothed fears by keeping policy very loose while ordering a review of the bank’s current outlay. That review could take 12-18 months, so the resulting Yen-weakness appears to be expectation that the BoJ will move cautiously during this review period.

Another theme has begun to re-appear ahead of tomorrow’s FOMC rate decision, and that’s banking stress in the US. This initially showed in early-March and the resulting impact to markets was lower US rates, a weaker US Dollar and building expectations that the Fed would cut rates later in the year. After a few days of pressure, those lower rates helped stocks to find support and the S&P 500 soon pushed back up to resistance that was in-play until yesterday. And while fear appeared to abate a bit, it’s come rushing back into the equation as regional banks remain under pressure and this morning marked another occurrence with PacWest leading the way lower for the regional bank group.

In USD/JPY, the breakout continued into this week with bulls pulling up just shy of a key spot of resistance at 137.87. The daily bar isn’t quite an outside bar at this point but there’s still a couple hours to go before that candle completes. The 135 level looms large as a spot of prior resistance that hasn’t yet seen much for support since the breakout.

USD/JPY Daily Chart

EUR/JPY

EUR/JPY drove up to a fresh 14-year high after last week’s Bank of Japan rate decision. This is the first time the pair has even traded above the 150 level since the Financial Collapse back in 2008, and the recent trend is really testament to just how strong the Euro has been.

But there’s an ECB rate decision on Thursday, less than 24 hours after the Fed. EUR/JPY has posted an outside bar already today, which isn’t quite an engulf but can have similar drive. The 150 level has since held support, but if we do see a continuation of the Yen-strength that’s shown up today, and if sellers can push below the 149.78 level, the door could quickly open to a deeper pullback. There’s deeper support potential at 148.48 and then 146.40, a spot of prior resistance turned support.

EUR/JPY Daily Chart

GBP/JPY

GBP/JPY showed a similar breakout with a bit less historical reference. While EUR/JPY jumped up to a fresh 14-year high, GBP/JPY tested a fresh seven-year high before pulling back to the 170 handle. The psychological level has since helped to hold the lows but similar to EUR/JPY above, and there’s lower-high resistance potential around the 171-171.11 area of the chart. Below 170, there’s a Fibonacci level at 168.10 that remains of interest for follow-through support potential.

GBP/JPY Eight-Hour Chart

--- written by James Stanley, Senior Strategist