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By Jameel Ahmad, Chief Market Analyst at FXTM
Just over two weeks ago, BoJ Governor Kuroda delivered a hawkish press conference where he displayed optimism surrounding recent Japanese economic data, and admitted confidence that the BoJ’s inflation targets were going to be achieved in 2015. For this reason, further QE stimulus from the BoJ was on hold. This encouraged a surge of strength for the Japanese currency, and a quick test of the 50% Fibonacci level for the USDJPY.
Since then, the USDJPY has advanced, after economic sentiment for both the United States and Japanese economy changed. Though, the pair recently failed to break out of its bearish trend line, or meet the upper 102.950 resistance in the process.
Although the BoJ appear very confident that their inflation targets are going to be reached in 2015, their latest CPI release caused quite a contradiction of opinion. Last month, Japanese inflation levels grew at their fastest rate in 23 years with an annualized 3.2% increase. This is far beyond the BoJ’s 2% target.
However, there are serious questions being asked as to whether the CPI is sustainable. A high proportion of last month’s CPI figure was due to consumers being encouraged to make purchases, before a new sales tax was imposed in Japan. Now that the sales tax has been executed, there are concerns whether consumer expenditure is going to drop. This would entice future Japanese CPI releases to decrease substantially.
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After revising the inflation data, the IMF quickly downplayed the BoJ’s claims that their inflation targets are achievable. In fact, they feel that at the earliest, a consistent 2% CPI could be achieved in 2017.
In reference to the US economy, improved metric data is slowly starting to build optimism that economic momentum is building for the United States. The most noticeable improved data is in relation to employment statistics. Not only did the US add the most jobs to their economy for 6 years in May, but over the past month, Initial Jobless Claims have averaged their lowest number since the global financial crisis began.
There are also signs that business investment is rising, with Durable Goods and US Manufacturing ISMs exceeding expectations. Consumer Confidence is improving, with the last reading advancing towards its second highest level in 7 years. Furthermore, the Federal Reserve has publicly announced that the US economy is set to accelerate throughout the remainder of 2014.
When looking at the USDJPY on the Daily timeframe, the pair failed to rally towards the 102.950 resistance level overnight, but may be looking to implement recently surpassed resistance levels (102.450 & 101.960) as potential support.
Overall, the emergence of today’s bearish candlestick signals to me that investors are looking to take profit on this pair, with a further rally resuming later on.
If the US economy shows consistency with their economic releases in June, specifically an impressive NFP on Friday and improved Consumer Confidence transitioning towards increased consumer expenditure, the USDJPY can surpass 103 very soon.
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