FX.co ★ USD/JPY. The yen regains its lost positions

The USD/JPY pair updated its nearly two-month high the day before yesterday (May 2), rising to 137.78. However, buyers of the pair could not test the 138-figure: a weakened dollar seemed to drag the price down like an anchor. In just three days, the yen has strengthened by more than 200 points, marking the base of the 134-figure area. It is worth emphasizing that such price dynamics are due solely to the weakness of the US currency. The "dovish" outcome of the Fed's May meeting ended the northern ambitions of USD/JPY buyers. At least - in the near future.

The pair gained momentum only thanks to the strengthening of hawkish expectations regarding the Fed's actions. Expectations were not met, and now the dollar is losing positions across the entire market. The dollar-yen pair is falling as rapidly as it recently rose. However, caution should be exercised when selling now: Friday's nonfarm payrolls could support the greenback, judging by the report published yesterday by the ADP agency. But they could also sink the dollar – especially if the inflationary indicator is in the "red zone."

Kuroda's Legacy

Recall that following its latest meeting (which took place for the first time under the leadership of Kazuo Ueda), the Bank of Japan maintained the main parameters of its monetary policy unchanged: the short-term deposit interest rate remained at -0.1% per annum, and the target yield for ten-year government bonds – around zero. In addition, the regulator maintained the range within which the yield of ten-year government securities can fluctuate (plus or minus 0.5%).

At the same time, the new head of the Japanese regulator essentially repeated Haruhiko Kuroda's rhetoric, stating that in the short term, it is advisable to implement a soft monetary policy to achieve the target two-percent inflation level "in tandem with wage growth." Ueda also repeated his predecessor's signature phrase, stating that the central bank would continue to ease monetary policy parameters without hesitation if necessary.

Although the new head of the Bank of Japan voiced similar theses over the preceding several weeks, the results of the May meeting still disappointed sellers of USD/JPY. Especially since hawkish sentiments began to intensify in the market on the eve of the Fed meeting – particularly after the US GDP growth data release. Inflationary components of the report strengthened confidence that the Federal Reserve would not only raise the rate by 25 points but also announce further steps in this direction. In the wake of such sentiments, the USD/JPY pair headed north, eventually approaching the borders of the 138-figure area.

The house of cards collapsed.

The house of cards collapsed yesterday when the Fed announced the results of the May meeting. The regulator raised the interest rate by 25 basis points but, at the same time, essentially ended the current cycle of tightening monetary policy. Jerome Powell said, "We are already close to the finish, and maybe we are already there." According to him, the issue of the appropriateness of further increases remains open (as inflation remains high, although it is decreasing). Still, at the same time, the economy's growth rate is slowing down, and there are risks of banks tightening credit conditions.

Powell tried to maintain balance in his rhetoric. Still, the market focused on another important circumstance: the Fed removed from the accompanying statement text the key phrase - about the need for further tightening. This phrase was replaced by a more vague wording, which boils down to the fact that the regulator will monitor incoming macroeconomic data (primarily in the inflation field), determining from meeting to meeting - whether another round of rate increases is needed. This phrase reminded many market participants of a similar wording used 17 years ago, in 2006, when the rate reached its peak value (5.25%). Then the Central Bank began to gradually (but consistently) lower it.

Today, there is no talk of a rate cut; Powell emphasized this, as they say, in a separate line. According to his forecasts, within the current year, the Fed will not soften the monetary policy parameters. However, removing the key phrase from the accompanying statement text speaks volumes. First, the base scenario for the Fed is to maintain a wait-and-see position at subsequent meetings.

Conclusions

USD/JPY buyers lost an important trump card yesterday, thanks to which the pair actively grew for several days. The hawkish hopes of dollar bulls dissipated, after which sellers seized the initiative on the pair.

Currently, the pair is testing the support level of 134.00 - the lower line of the Bollinger Bands indicator on the daily chart. If the USD/JPY bears overcome this target, the next target of the southern movement will be 132.80 - at this price point, the upper and lower lines of the Kumo cloud coincide on the same timeframe.

Short positions are a priority, but it is necessary to remember the nonfarm payrolls, which will be published at the start of the American session on Friday. The ADP report, which precedes the official figures, came out in the "green zone," reflecting the creation of almost 300,000 jobs with a forecast of 148,000. Therefore, Nonfarm Payrolls may also be on the side of the American currency. Overall, the USD/JPY pair will continue to move in the wake of the American currency: the yen cannot play its own game.