USD/JPY Pulls Back As Fed Calms Nerves, But Bullish Momentum Remains

Summary:

The Fed calms investors' nerves following Wed's inflation spike, allowing the USD/JPY to retrace. However, bullish momentum remains.

The USD/JPY dipped for the second day in a row after the Federal Reserve moved to calm down investors’ nerves over the spiraling consumer inflation in the United States. The greenback lost 0.3% against a basket of currencies on Friday, sending the USD/JPY lower by 0.13%.

Wednesday’s surprise surge in consumer inflation by 0.8% triggered a stock market selloff. It spurred gains in the USD/JPY as the number re-awakened expectations of hawkish Fed action to control the inflation rate. But Federal Reserve officials quickly moved to play down such expectations.

However, economists at Credit Suisse still have a bullish view on the USD/JPY, projecting that a break above 109.95/109.97 could clear the way for price to target the 110.97 high seen earlier in March. This price level is the resistance barrier that bulls need to clear to restore price continuation in the uptrend direction.

Technical Outlook For USD/JPY

The corrective decline of the last two sessions has met support at 109.310. This is the site of previous highs of 15-19 March and 30 April. If this support holds and bulls push the price up from there, a retest of 109.704 will be on the cards. A break of this resistance allows the price to target 108.00 initially (psychological resistance seen as the 9 March high), with the potential for the USD/JPY to reclaim the 2021 highs at 110.96. Price activity may find a pitstop at 110.586.

Conversely, a breakdown of the 109.310 support allows for a greater decline towards the demand zone between 108.819 and 108.468. A further decline sends the pair towards the 107.824 support (5 March and 22 April lows). Additional support at 106.998 only comes into the picture if the decline is more extensive.