Fundamental analysis of USD/JPY

A brief review of economic developments:

U.S.:

The U.S. Federal Reserve (Fed) may raise its key rate at its next meeting, despite the announcement of a planned pause in June.

U.S. inflation continues to rise, reaching 5% y/y, the highest level in 13 years. This could put pressure on the Fed to accelerate rate hikes.

Japan:

The Bank of Japan is sticking to its low interest rate policy, which is putting pressure on the yen.

Japan's economy is still recovering from the pandemic but the pace of recovery is slower than expected which also negatively affects the JPY.

Macroeconomic data impact:

The BSI index of business conditions for large manufacturers in Japan showed improvement, which could provide support for the yen. However, given the overall economic picture this is unlikely to change the trend significantly.

The OPEC report could have an impact on the dollar if it contains significant changes to oil supply and demand projections.

The underlying U.S. consumer price index (CPI), both m/m and y/y, could strengthen the dollar if real data exceeds forecasts. This will heighten expectations of a Fed rate hike.

Technical Analysis and Scenarios:

Key levels:

Support levels: 137.835, 138.275, 138.525, 138.890, 139.390

Resistance levels: 139.880, 140.270, 140.600, 140.980

Bollinger Bands: The pair is correcting at the Bollinger Bands Moving Average, which is the nearest support level. Considering that the indicator is pointing sideways and the price corridor has contracted, we might be in a consolidation period before the next major move.

MACD: The MACD value is below the signal line, which is usually a sell signal. However, there is not much difference between the two, which indicates a lack of strong momentum.

Stochastic Oscillator: The Stoch value is above the signal line but it has not yet reached an overbought level, which might indicate for a slight strengthening of the dollar against the yen.

Main scenario: The USD is likely to continue strengthening amid expectations of Fed rate hikes and rising inflation, we can expect an upside breakout. In that case, the resistance level of 139.880, with the possibility of further growth to 140.270, might be a buy target. Stop loss can be set at the support level of 139.390.

Alternative scenario: If JPY strengthens on the back of improving business conditions, as well as strong GDP data in Japan and weakness of the dollar, we might expect a break-down. In that case, the support level of 138.890 might be a selling target, with the possibility of further decline to 138.200. Stop loss can be set at the resistance level of 139.390.