In light of recent comments from FOMC members Michael Barr and Raphael Bostic, it is evident that there is a growing sentiment within the Federal Reserve for a more cautious approach towards rate cuts. Despite this, the market is still pricing in a September rate cut, albeit with slightly reduced confidence. This shift in sentiment has led to an increase in the probability of the Fed keeping interest rates unchanged in September, as indicated by the CME FedWatch Tool.
Considerations for Inflation, Labor Market, and Timing of Rate Cuts
In order to better understand the potential trajectory of interest rates and the USD/JPY currency pair, it is essential to take into account several key factors. These include the outlook for inflation, the state of the US labor market, and the timing of any potential rate cuts by the Fed. While recent economic data has been mixed, with some positive indicators such as strong labor market data and subdued inflation, uncertainties still remain.
The near-term movements of the USD/JPY currency pair are likely to be strongly influenced by central bank commentary leading up to the release of preliminary Services PMIs on Thursday. Hawkish statements from the Fed could bolster demand for the USD/JPY, pushing the pair higher. Conversely, any indications of weakness in the US service sector could prompt a more dovish stance by the Fed, potentially leading to downward pressure on the pair.
From a technical standpoint, the USD/JPY pair is currently trading comfortably above both the 50-day and 200-day exponential moving averages, signaling a bullish bias. A decisive break above the 157 level could pave the way for a move towards 158, with further upside potential towards the April 29 high of 160.209. On the other hand, a breach below the 155 level could attract selling interest, potentially pushing the pair lower towards the 50-day EMA and the key support level at 151.685. The 14-day RSI reading of 58.30 suggests that there is still room for further upside before the pair enters overbought territory.
While recent comments from FOMC members have introduced some uncertainty into market expectations, the USD/JPY pair remains poised for potential moves in either direction, depending on upcoming economic data releases and central bank commentary. Traders and investors would be wise to monitor these developments closely in order to position themselves effectively in the currency markets.