USDJPY continues winning spell on hawkishness of the Fed

The USDJPY currency pair after a week fully recovered all the losses caused by the U.S. inflation report for April. The weakening of the dollar against the yen again had only a local character, while fundamental factors continue to support the U.S. currency. Given the recent interventions by the Bank of Japan, currency market participants are unlikely to try to break through the level of 160 again. At the same time, the 158 mark looks like a more reasonable target.

Yesterday, the dollar recovery was supported by the release of the minutes of the Fed meeting held on May 1. Officials of the U.S. regulator expressed disappointment with the inflation data, noting the need for strong evidence of steady movement of the consumer price index to the target level of 2%. The current U.S. monetary policy was considered to be balanced, but high interest rates should be maintained for a long time to normalize inflation.

Goldman Sachs CEO David Solomon, commenting on the report from the May Fed meeting, noted the excessive optimism of investors. Traders continue to expect 1 or even 2 key rate cuts before the end of 2024, but economic data does not fit this scenario. According to Solomon, the U.S. regulator will not ease monetary policy this year for concern about another spike in inflation.

Meanwhile, April statistics on price growth in Japan will be released tomorrow. Analysts surveyed by Bloomberg forecast the country's overall inflation rate to slow to 2.2% from 2.6%. The core rate will also decline and is likely to renew the lows since the fall of 2022. In this regard, UBS experts are skeptical about the chances of a sharp tightening of the Bank of Japan policy. They keep the annual target for USDJPY at 160, recommending buying out all drawdown below 152.

The RSI indicator on the daily chart of USDJPY returned to growth, but remains far from the overbought zone. The bulls have a great opportunity for quotes to rise to the level of 158, where it is advisable to fix at least a part of long positions.

The following trading strategy may be offered:

Buying USDJPY at the current price. Take profit – 158. Stop loss – 155.

Traders may also use a Trailing stop instead of a fixed Stop-loss at their discretion.