USD/JPY Testing the 200 Daily SMA As Risk Assets Improve

USD/JPY turned bullish early this year as the USD retreat stalled but it failed to break above the 200 SMA (purple) on the daily chart. The price retreated lower but late last month buyers retested this moving average, although they failed for the second time.

Now, this pair has been advancing for several days and is approaching the resistance zone around 138, which is where the 200 SMA stands. USD/JPY is heading toward the 200-day SMA, which is causing some hesitation among buyers. However, the overall trend suggests that the buying momentum will likely continue. The recent bullish momentum has resulted in higher highs and higher lows, indicating that any pullbacks are likely to attract new buyers and strengthen the upward movement.

The US dollar has been strengthening in recent days due to progress being made in resolving the debt ceiling issue, reducing the likelihood of a default. This development has restored confidence in the dollar at a time when investors are seeking safe haven assets, including the US currency and value stocks such as major tech companies.

Additionally, inflation expectations for the long term have been revised upward, leading to an increase in US yields. After a significant decline at the beginning of May following the Fed’s suggestion of a potential pause in rate hikes starting in June, market expectations have shifted. Currently, the market-implied rate curve indicates a 82% probability that there will be no rate hike on June 14th, down from 98% immediately after the May meeting.

USD/JPY had a strong rally this week, breaking two important technical levels: the first one near 136.60 and the second one at 137.05. This bullish development yesterday has reinforced the upward momentum, bringing the pair close to its 2023 peak just below the key psychological level of 138.00. The next major resistance level to watch is at 138.00. Given the current market sentiment favoring the upside, there is a possibility that the pair may surpass the 138.00 mark and reach fresh yearly highs, potentially pushing toward 140.00 in the near term.

If there is a setback and a bearish reversal, the initial support level lies at 136.60. Further weakness could lead to a potential pullback towards 135.25/ But risk sentiment remains positive, after several positive events. The Atlanta Fed GDPNow, which measures economic growth, increased to 2.9% from its previous reading of 2.6%. This indicates a more optimistic outlook for the economy. Additionally, President Biden expressed confidence regarding the debt ceiling issue, following constructive comments from Republicans. These developments have contributed to an improvement in overall risk sentiment which will likely keep the JPY in retreat.

USD/JPY Live Chart