USDJPY in a bearish divergence pattern: eyes on 134.5 supportThe USD/JPY daily chart shows a bearish divergence pattern as prices surged to new 20-year highs this week, while the relative strength index (14-day RSI) declined significantly from overbought levels.
The Moving Average Convergence Divergence (MACD) is nearing a bearish crossover, as the MACD line (blue line) is sloping lower and may intersect the signal line (orange line) from above. The focus is now on the 134.5 support level, which if violated might result in further USD/JPY drops.
The dollar-yen exchange rate fell below 135 levels at 14:15 UTC, down by 0.9% on the day. Year to date, the yen has lost 17% of its relative value to the dollar.
In the fundamental picture, the need to control inflation through aggressive hikes in interest rates is the main factor causing concerns about an impending recession in the U.S..
Fed futures are now pricing rates at 3.5 percent by the end of the year, while the yield on the US 2-year Treasury note has dropped below 3%, down from 3.5 percent last week. It is a sign that the market has not lifted its expectations for interest rates following Powell's speech yesterday, and instead perceives the possibility of a Fed that will halt rate hikes in the case of a recession.
There is no surprise from the Bank of Japan, and in the short term, we shouldn't expect a big shift toward more restrictive policies. But some former policymakers, like Takehiko Nakao, a former head of foreign exchange policy at the Finance Ministry, flagged that an extremely weak yen is negative for the Japanese economy.
Traders are now waiting for the publication of the June US PMIs. The manufacturing PMI is predicted to fall to 56.5 from 57 in May, while the survey for the service sector is expected to rise to 53.5 from 53.4 in May.
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