USD/JPY likely to retreat on growing US recession fears

USD/JPY OUTLOOK:

  • Despite Wednesday’s slight rebound, USD/JPY has corrected lower in recent days, following the pullback in US Treasury rates
  • Weakening US economic data and growing recession fears could weaken the US dollar against the Japanese yen in the days and weeks ahead
  • This article looks at key USD/JPY technical levels to watch in the near term and where there might be some kind of backlash

Most read: EUR/USD Outlook – EURUSD pullback threatens recent gains

Last Friday I discussed the close positive correlation between USD/JPY and the US 10-year yield and argued that the US dollar could continue to weaken if Treasury rates extend their correction. This forecast has been going well so far, with the pair falling from 128.20 to 127.15 over the past three days, despite today’s modest advance, a pullback that coincided with the drop in yield. 10 year from 2.85% to 2.72% at time of writing.

Jits relevant question now, however, is whether recent price momentum be supported Short term. Although the monetary policy divergence between the Federal Reserve and the Bank of Japan has been a tailwind for the greenback in recent months, it is possible that we has reached US central bank aggressiveness peak, at least for now and barring new surprises on the inflation front. This could benefit the Japanese yen.

Another variable to consider when assessing the USD/JPY outlook is the health of the US economy. In recent weeks, the arrival economic data have disappointed estimates and shown that the activity is deceleration much faster than anticipatedraising fears that a recession may be just around the corner.

Concerns about a slowdown have led market participants to reassess the trajectory of the tightening cycle and they not anymore fully delivery two half-point increases by July. While expectations could still change, current prices reveal traders believe the Fed may not be able to deliver on its promise to aggressively phase out accommodations and rising interest rates on purchase if the economy continues demote at a frantic pace.

With the US recession narrative strengthening, with Treasury rates falling from recent highs, Wall Street in freefalland rising risk aversion sentiment, the Japanese yen appears to be in a better position to extend its rally against the US dollar over the coming days and weeks.

Let’s move on to the economic calendarthe focus will be on the April US PCE scheduled for Friday. you.S. markets are closed next Monday for the Memorial Day holiday and traders begin to leave their offices for the long weekend, so liquidity conditions could deteriorate further in the coming days. Low liquidity could amplify price volatility if key data surprises relative to expectations. Check DailyFX Calendar to see what traders are waiting for.

In terms of technical analysis, USD/JPY has bounced off support in the 126.50 area and appears to be heading towards trendline resistance near 127.40. If the price manages to clear this hurdle, the bulls could launch an attack at 128.40, the upper boundary of a short-term descending channel. On further strength, the focus moves higher to 129.75. On the other hand, if the sellers return and trigger a bearish reversal, the initial support extends from 126.50/126.15. If this zone is breached on the downside, USD/JPY could head towards the psychological level of 125.00.

USD/JPY TECHNICAL CHART

USD/JPY chart prepared using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX

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