Fundamental analysis of USD/JPY

The dollar/yen was slightly lower on Thursday, amid expectations for two significant events next week: the publication of U.S. inflation data for May and the Federal Reserve's (Fed) upcoming rate decision. Investors are looking forward to these events, which could have a significant impact on currency markets.

High Stakes: U.S. Inflation Data

Market participants are particularly interested in U.S. inflation data, which is expected on June 13. Forecasts suggest a 0.30% increase in prices for the month of May. This figure is very important because it will greatly influence the Fed's decision-making process. If inflation continues to rise, it could strengthen the case for further rate hikes to effectively manage the economy. On the contrary, if the data show a slowdown in price growth, it could cause the Fed to take a more cautious approach.

Inflation rises, hopes for rate cuts fade

In addition, the market has diminished expectations of Fed rate cuts this year due to persistently exceeding the inflation target. It is noticeable that inflation remains resilient not only in the U.S. but also in other G10 countries. As a result, central banks are likely to be cautious and prudent in their policy decisions, given the broader economic context.

The dollar is resilient despite rate differentials

Despite possible pressure from foreign central banks, the dollar is poised to sustain losses thanks to the possibility of an additional Fed rate hike in July. The Fed's indication that it may not finish raising rates may differ from central bank policy in Canada, Australia, and possibly the European Central Bank at their meeting this month. This difference in monetary policy trajectories may support the dollar.

Japan's economy exceeds expectations

In related economic news, revised data showed that Japan's economy performed better than originally estimated for January-March. Recovery from the pandemic led to an increase in domestic spending and companies' efforts to restock, offsetting the negative impact of slowing global demand for exports. The resilience of Japan's economy is noteworthy, and sustaining this growth will depend on continued wage increases and sustainable private consumption, which are key policy goals for the Bank of Japan and the government.

Support ahead of CPI data release, Fed rate decision

Market anticipation of significant upcoming events, in particular the imminent release of US inflation data and the upcoming Fed rate decision, ultimately contributed to the recent rise in USD/JPY. These events have significant implications for currency markets.

Upcoming inflation data will be closely analyzed, shaping the Fed's approach to rates and affecting the dollar in the short term. Despite the challenges posed by foreign central bank actions, the possibility of further Fed rate hikes may nevertheless create a favorable outlook for USD/JPY.

Trading Scenarios:

Support levels: 137.380, 137.840, 138.275, 138.520, 139.090, 139.550.

Resistance levels: 139.700, 140.270, 140.600, 140.980.

Main scenario:

If the pair USD/JPY is able to hold above the support level 139.550, we can expect the continuation of the uptrend. In this case, the resistance level of 140.270 may become a target for take profit. Stop loss in this case should be placed below the support level of 139.090 to minimize potential losses in case of unfavorable development of the situation.

Alternative scenario:

If the pair fails to stay above the support level of 139.550 and starts moving downward, it may be a signal to sell. In this case the support level of 139.090 may become a take profit target. Stop loss should be set above the level of 139.700.