IMPROVED RISK SENTIMENT WEIGHS ON THE YEN
News of a possible agreement to raise the debt ceiling filtered through to markets yesterday evening and has continued to ease risk sentiment this morning. Updates from both sides of the US political system mentioned that a deal could be done by Sunday and that the framework for an agreement has been established. The Japanese yen appears more vulnerable with tensions over a US default subsiding.
USD/JPY: TWO FORCES COMBINE, SENDING THE PAIR HIGHER
Looking at USD/JPY ahead of Japanese inflation data tomorrow and a speech by Fed Chair Jerome Powell at an event titled ‘Perspectives of Monetary Policy,’ it is clear to see the effect of both a stronger dollar and weaker yen at play. The dollar has ticked higher upon recent revelations of entrenched inflation expectations on the part of the US consumer and stubborn inflation. Rising US yields have also emboldened dollar bulls to return to the market after a period of heavy selling.
USD/JPY trades on the cusp of the upper side of the ascending channel, which has, but for the prior false breakout, contained price action thus far. The pair now trades above the 200 SMA, flirting with the crucial 138.20 level of resistance – a level has been approached multiple times this year without the needed momentum to trade above. However, given that this move involves both a weak yen and a stronger dollar, momentum may be on the side of USD/JPY bulls. A lot will depend on whether an agreement can be reached on the debt ceiling this week.
GBP/JPY: REGROUPING BEFORE ATTEMPTING UPSIDE BREAK
GBP/JPY is at a similar juncture, testing resistance, but has shown indications of an intra-day pullback. The pair approaches the orange line, representing the high of the significant 2020 to 2022 bullish advance seen on the monthly chart and other relevant levels of resistance should the pair clear 172.13. Early indications point towards a pullback towards 171.07 before another attempt at the critical resistance level can be considered. The RSI has moved away from overbought territory, suggesting there is still some room left to the upside before a deeper pullback may be on the cards.
EUR/JPY: BULLISH MOVE CAPPED BY PRIOR SWING HIGH
The EUR/JPY daily chart reveals a slowing of bullish momentum at the prior swing high of 149.27 in early European trade. The re-emergence of US regional bank fears appears to have subsided, allowing the rising interest rate differential between the two currencies to pull the pair higher.
ECB officials are scheduled to speak on Thursday and Friday to reiterate the need for further tightening to control inflation that is yet to see a meaningful decline, particularly on the core measure (inflation ex-food and energy). The RSI eases away from overbought territory, suggesting more room to the upside; 149.27 remains the tripwire for a bullish continuation.