USD / JPY: Yen conceded at 112th figure

Today, the dollar/yen currency pair updated its annual maximum, closely approaching the boundaries of the 112th figure. Strengthening of the US currency against the backdrop of reducing anti-risk sentiment in the market pushes the pair upward, while the yen still does not have its own arguments for growth.

The temporary strengthening of the Japanese currency was due to a surge of geopolitical tensions when the threat of a full-scale war between the two states possessing a nuclear arsenal arose. For several days, the situation "hung in the balance" amid mutual accusations which increased the likelihood of further escalation. In turn, this fact increased the demand for defensive assets. However, there are hints to resolve the conflict today. According to the Prime Minister of Pakistan about the Indian pilot captured by the Pakistani military, he will be released as soon as possible. Moreover, he said that Pakistan demonstrates a peaceful gesture in order to de-escalate the conflict situation.


In addition to the Indo-Pakistani conflict, traders were also worried about the failure of negotiations between Trump and the UN. Let me remind you that the negotiation process between the leaders of the United States and the DPRK was completed ahead of schedule since the Americans rejected the proposal of the North Korean side. But later it became known that the parties agreed to continue bilateral relations and the heads of state promised to hold a new meeting over time "in order to continue the productive discussion."

Thus, the geopolitical situation changed quite dramatically, literally within 24 hours. After which, a risk appetite appeared on the market and both the gold and yen began to lose value. Consequently, the dollar received support from data on the growth of the American economy. Although the GDP indicator showed an expected decrease, the rates of slowing down of this indicator were not so fast.

Therefore, the index rose to 2.6% instead of the 2.2% projected GDP growth in the fourth quarter of last year. In addition, the positive surprise of yesterday's released dynamics of the GDP price index as it came out a little better than expected to 1.8% instead of 1.7%. Although, the fact remains that the index stayed at the level of the third quarter. Also, traders drew attention to Chicago's PMI, which peaked from December 2017. The business activity index in Illinois jumped to 64.7 points in February in contrary to the forecast growth to 57.5. For comparison, last month this indicator went out at around 56.7. The structure of this indicator suggests that the components of new orders, production and employment rose to maximum levels.

It should be noted here that the dynamics of GDP remain negative since the decline in the indicator has been recorded for the third quarter in a row. However, the dollar bulls were able to "convince" the market, arguing that the prospects for the American economy are not as pessimistic as they say and this means that the Fed can resume monetary tightening in the second half of this year. In my opinion, these findings are too premature. Jerome Powell, who spoke in Congress, has acknowledged that the US economy is "in good shape," but there are other constraints that influence the regulator's determination such as the global economic dynamics, weak inflation, and wages. In other words, yesterday's data is unlikely to form the basis of a dollar rally. We are dealing only with a temporary correction.

Nevertheless, if we talk directly about the USD/JPY pair, the dollar will be the priority here since the yen focuses mainly on external fundamental factors. The de-escalation of the Indo-Pakistani conflict, as well as the continuation of the dialogue between the United States and the DPRK reduced anti-risk sentiment, resulted in a depreciation of the yen across the entire market. "Internal" fundamental factors only encourage the devaluation process.

Thus, there are rumors saying that the Bank of Japan may expand a stimulating program in the near future by increasing the purchase of government bonds are being actively circulated in the market. According to Kuroda, the regulator will resort to such measures, "if the economy and inflation lose momentum." It is worth recalling that the Japanese economy grew by 0.3% compared to the third quarter, failing to reach the forecasts of most analysts to 0.4%. Inflation in Japan is also growing at a rather weak pace and still far from the target level, given the CPI data of 0.8% with a baseline of 0.4%, Therefore, the likelihood of monetary policy easing by the Bank of Japan is really quite high.


Summarizing what has been said, we can draw several conclusions. First, the dollar/yen pair has reasonably left the price range of 110-111, where most of February was located). Secondly, the pair has the potential for further growth.

On the daily chart, the price is on the upper line of the Bollinger Bands indicator and these lines demonstrate the expanded channel. The Ichimoku indicator has formed one of its strongest signals with a bullish Parade of Lines. In addition, the pair is located above the Kumo cloud, which also indicates the northern direction of the price. Purchases can also be viewed from current levels, although, it is better to wait for the price to fix in the area of the 112th figure. It is worth noting that the next resistance level of 114.75 is quite high on the upper line of the Bollinger Bands indicator.

The material has been provided by InstaForex Company -