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Rates and growth differentials are still receding into the background

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USD / JPY News and Analysis

  • The appearance of doji candles indicates indecision USD / JPY
  • Negative but better-than-expected Japanese GDP data worsens fundamental forecasts
  • Bearish divergence suggests a current USD/JPY consolidation can turn into a rollback

Doji candles point to great indecision for the USD / JPY

The Japanese yen seems to be consolidating below 130 as the USD / JPY is on track to mark the third day of doji candles on the daily chart. Dodge candles usually indicates indecision, which is a good way to sum up the latest USD / JPY price action.

The yen has been under pressure since Russia’s “special military operation” in Ukraine, as the island nation imports 70% to 80% of its oil consumption and thus remains sensitive to rising oil prices. Not only that, but the recent depreciation of the yen complicates the problem as more local currency is required to pay for the already raised crude oil.

A fundamental prediction of Japan’s deterioration

Earlier today, the previous growth rate of Japan’s GDP for the 1st quarter showed a decline in economic growth from -0.2% in the quarter, while on an annualized basis, the figure fell by 1%. In previous readings, both figures ranged from positive to negative, avoiding a technical recession.

Blocks in China are also expected to have a significant impact on the Japanese economy, further exacerbating the outlook.

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Rates and growth differentials are still receding into the background

USA GDP and the path of raising rates continues, although GDP has been revised down from 4% to 3.7% in line with the IMF’s global economy forecast released in April. The 0.3% decline in GDP seems quite strong compared to Japan’s 0.9% decline in GDP over the same period.

The Fed has already raised rates twice this year, and recent Fed officials cited two more increases of 50 basis points in June and July in line with market expectations according to Fed fund futures.

USD / JPY technical levels

As mentioned earlier, the USD / JPY chart shows multiple doji candles as the prevailing uptrend is shrinking due to the slightly softer dollar. Stock markets and other pro-cyclical currency pairs have regained losses in recent days as risk sentiment seems to have stabilized somewhat. Thus, funds flow from the “safer” dollar to stocks and commodities.

The key resistance remains at 130 s support all the way back to 125. Despite weak fundamentals, the negative divergence shown on RSI suggests we could see lower USD / JPY prices. The indicator made lower highs, while price action printed higher highs, suggesting that a pause in the trend could turn into a deeper pullback.

Daily USD / JPY chart showing Doji candles

USD / JPY outlook: rates and growth differentials are now receding into the background

Source: TradingView, prepared Richard Snow

In addition, Yields on 10-year U.S. Treasury bonds seem to be rising again (to a mark of 3%), which tends to support the appreciation of the dollar.

Yield of 10-year US Treasury

USD / JPY outlook: rates and growth differentials are now receding into the background

Source: TradingView, prepared Richard Snow

In contrast, the Bank of Japan is actively intervening in the bond market to suppress yields (borrowing costs) in an attempt to support the economy. The growth of US / Japan spreads is contributing to the dollar, which means that USD / JPY can remain supportive for much longer.

Yields on 10-year Japanese government bonds (JGB).

USD / JPY outlook: rates and growth differentials are now receding into the background

Source: TradingView, prepared Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

https://www.dailyfx.com/forex/market_alert/2022/05/18/USDJPY-Outlook-Rates-and-Growth-Differentials-Take-a-Back-Seat-for-now-RS.html

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