USD/JPY Slides as Markets Contemplate Fed & BoJ Pivot Prospects

USD/JPY Analysis

The Fed has turned cautious around removing monetary restraint as inflation shows persistence, the economy outperforms and the labor market is strong. In his first day of Congress testimony, Fed Chair Powell stayed the course, saying it will "likely be appropriate" to begin cutting rates "at some point this year", bit wants to see "a little but more data" before doing so ^[1]. He largely reiterated previous remarks and leaned hawkish, but did not surprise markets and the greenback came under pressure.

The Bank of Japan is in the opposite direction, as it employees an ultra-loose setting and tries to restore price stability with pay increases. Fighting decades of deflation, policymakers are reluctant to normalize policy, but have hinted towards such action and they appear increasingly confident that they can achieve their goal. Inflation has stayed above the 2% for nearly two years.

Japanese officials seem poised to pivot before their US peers. They could move in April, waiting the outcome of the wage negotiations or even in two weeks, in a decision that is announced just a day ahead of the Fed. However, monetary policy is at intricate phase and the BoJ has resisted a pivot so far.

USD/JPY slumps this week as markets digest pivot prospects by the two central banks. It moves below the EMA200 and breaches the 23.6% Fibonacci, which exposes it to the 38.2% level and the February low (146.82-145.88).

On the other hand, this confluence of supports along with the daily Ichimoku cloud and the oversold RSI can contain the drop and give USD/JPY a chance to react. The correction so far is shallow and the greenback can return above the EMA200. This will reinstate the bullish bias, but taking out 152.2 becomes harder.