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The Japanese yen continues to post strong swings this week and is up sharply on Friday. USD/JPY is trading at 134.67 in Europe, up 1.86% on the day.

BoJ maintains yield curve control

It’s been a busy week, with the markets still digesting some dramatic moves by central banks. The Fed and SNB delivered massive salvos in their fight against inflation, and the BoE continues to tighten, albeit at a more modest pace. The week wrapped up with the Bank of Japan policy decision earlier in the day. These meetings are usually on the dull side, with the central bank merely reaffirming its ultra-loose policy, with the occasional tweak. Today’s meeting was closely watched, however, as the BOJ’s yield curve stance has been under pressure and there was speculation that the BoJ might retreat and release the cap of 0.25% on 10-year JGBs.

In the end, the BoJ did not blink or budge, maintaining its policy for yield curve control and QE. The BOJ reaffirmed it will continue its policy of rock-bottom rates, even though other major central banks are tightening policy, as we saw this week with the Fed, BOE and SNB. Governor Kuroda has insisted that monetary easing remain in place, given Japan’s slow recovery from the Covid-19 pandemic. With inflation barely at 2%, the central bank’s target, Kuroda can afford to continue his loose policy and tenaciously defend the BoJ’s yield curve.

The BoJ didn’t adjust policy today but it was noteworthy that the policy statement added the exchange rate to its list of risks, something we haven’t seen in previous statements. The yen hit a 24-year low at 135.60 earlier this week and could fall even further. The Bank is sending a message that it is monitoring the exchange rate, but I question whether this will deter the markets from continuing to test the yen – previous jawboning from the BoJ and Ministry of Finance didn’t succeed in stemming the yen’s slide, and we could well be on our way to a 140 yen if the US/Japan rate differential continues to widen.

USD/JPY Technical

• USD/JPY is testing resistance at 133.14. Above, there is resistance at 1.3585
• There is support at 131.72

Eurozone CPI was finalized at 8.1% yoy in May, up from April's 7.4% yoy. All-items excluding energy rose from 4.1% yoy to 4.6% yoy. All-item excluding energy, food, alcohol and tobacco rose from 3.5% yoy to 3.8% yoy. Energy prices accelerated from 37.5% yoy to 39.1% yoy. Food, alcohol and tobacco prices accelerated from 6.3% yoy to 7.5% yoy.

EU CPI was finalized at 8.8% yoy, up from April's 8.1% yoy. The lowest annual rates were registered in France, Malta (both 5.8%) and Finland (7.1%). The highest annual rates were recorded in Estonia (20.1%), Lithuania (18.5%) and Latvia (16.8%). Compared with April, annual inflation fell in one Member State and rose in twenty-six.

Full release here.

BoJ Governor Haruhiko Kuroda said in the post-meeting press conference, "the recent rapid weakening of the yen is raising uncertainty over the outlook and making it hard for companies to draw up business plans so it is negative and undesirable for the economy."

"We will have to closely watch developments in financial and currency markets and their impact on the economy and prices," he added.

Kuroda also added, "policy tightening is not appropriate at this point." And he warned, "if the 10-year JGB yield exceeds 0.25%, that would diminish the effect of our monetary easing."

Cable eases in early Friday, following strong rebound in past two days which lost traction at the first strong obstacle at Fibo 38.2% of 1.3147/1.1933 descend, denting initial signal of reversal.

Sterling was boosted by BOE’s rate hike by 25 basis points to 1.25% (the fifth rate increase since December) and hawkish shift in central bank’s expectations, but remains highly volatile.

Cable remains supported by BOE’s action and strong headwinds that bears faced at psychological1.20 support, but overall strong dollar continues to weigh.

Daily studies remain bearishly aligned, as negative momentum remains strong and MA’s are in bearish setup, though initial positive signal is developing on formation of long-tailed Doji or possible hammer candlestick and bear-trap under 1.20 level.

Look for clearer direction signals, which would be generated on drop and close below 5 DMA (1.2191) that would weaken near-term structure and risk renewed attack at 1.20 zone, or sustained break above Fibo 38.2% barrier at 1.2397 which would signal further advance.

Res: 1.2397; 1.2420; 1.2456; 1.2540.
Sup: 1.2220; 1.2191; 1.2155; 1.2099.

Daily Pivots: (S1) 160.92; (P) 162.36; (R1) 164.71; More...

Break of 165.14 minor resistance suggests that pull back from 168.76 has completed at 159.97. Intraday bias is back on the upside for retesting 168.67. Firm break there will resume larger up trend. On the downside, below 159.97 will extend the correction from 168.67 towards 155.57 support.

In the bigger picture, up trend from 123.94 (2020 low) is still in progress. Sustained break of 61.8% retracement of 195.86 (2015 high) to 122.75 (2016 low) at 167.93 will be a long term bullish signal, and could pave the way back to 195.86 high. This will now remain the favored case as long as 155.57 support holds, even in case of deep pull back.

Daily Pivots: (S1) 138.02; (P) 139.31; (R1) 140.79; More....

Breach of 141.48 minor resistance suggests that pull back from 144.23 has completed at 137.83. Intraday bias is back on the upside for retesting 144.23 first. Firm break there will resume larger up trend. On the downside, below 137.83 will turn bias back to the downside to extend the correction from 144.23.

In the bigger picture, up trend from 114.42 (2020 low) is in progress. Such rise is seen as the third leg of the pattern from 109.30 (2016 low). Sustained trading above 100% projection of 114.42 to 134.11 from 124.37 at 144.06 will indicate upside acceleration and target 149.76 long term resistance (2014 high). In any case, outlook will now remain bullish as long as 132.63 support holds, in case of deep pull back.

Daily Pivots: (S1) 1.4862; (P) 1.4975; (R1) 1.5085; More...

Intraday bias in EUR/AUD remains neutral at this point. On the downside, break of 1.4759 support will suggest that rebound from 1.4318 has completed. Intraday bias will be turn back to the downside for retesting 1.4318 low. On the upside, above 1.5187 will target 1.5277 resistance and than 1.5354 support turned resistance next.

In the bigger picture, as long as 1.5354 support turned resistance holds, larger down trend from 1.9799 (2020 high) is still expected to continue. On resumption, next target is 61.8% projection of 1.9799 to 1.5250 from 1.6434 at 1.3623, which is close to 1.3624 long term support (2017 low). However, firm break of 1.5354 will indicate medium term bottoming and bring stronger rally back to 1.6434 key resistance.

Daily Pivots: (S1) 0.8492; (P) 0.8563; (R1) 0.8614; More...

Intraday bias in EUR/GBP stays neutral at this point. Further rise is expected as long as 0.8484 support holds. Break of 0.8720 and sustained trading above 0.8697 medium term fibonacci level will carry larger bullish implication. Next target is 0.9003 fibonacci level. However, break of 0.8484 will indicate rejection by 0.8697 and turn near term outlook bearish.

In the bigger picture, rise from 0.8201 medium term bottom could could either be a correction to the down trend from 0.9499 (2020 high), or a medium term up trend itself. Sustained break of 38.2% retracement of 0.9499 to 0.8201 at 0.8697 will affirm the latter case, and pave the way to 61.8% retracement at 0.9003. However, rejection by 0.8697 will maintain medium term bearishness.

Daily Pivots: (S1) 1.0081; (P) 1.0249; (R1) 1.0367; More....

Intraday bias in EUR/CHF stays on the downside for 1.0086 support first. Corrective rebound from 0.9970 should have completed already, after second rejection by 1.0505 support turned resistance. Break of 1.0086 will bring retest of 0.9970 low. On the upside, above 1.0232 minor resistance will turn intraday bias neutral first. But risk will stay on the downside as long as 1.0512 resistance holds, in case of recovery.

In the bigger picture, as long as 1.0505 support turned resistance (2020 low) holds, long term down trend from 1.2004 (2018 high) is expected to continue. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. However, firm break of 1.0505 will suggest medium term bottoming, and bring stronger rebound towards 1.1149 structural resistance.

USDCAD has been confined within the 1.2859 – 1.2875 zone over the past three days, but its short-term outlook continues to look bright.

Particularly, the MACD remains positively charged above its signal and zero lines, while the rising RSI has yet to reach its 70 overbought mark, both suggesting that last week’s impressive rally off 1.2516 could gain more legs. On the other hand, the Stochastics have pivoted southwards, though the indicators remain above their 80 overbought level for now, keeping the bias on the bullish side for now.

If the 1.2875 nearby resistance gives way, the 1.3026 number, which overlaps the 200-weekly simple moving average (SMA) and the 38.2% Fibonacci retracement of the 2020 downtrend, may attract special attention before the spotlight turns to May’s peak of 1.3075. Should the bulls accelerate from here, the 50% Fibonacci of 1.3340 and the 1.3380 barricade from the second half of 2020, could be the next obstacle.

In case buying pressures fade immediately, the pair will again seek shelter around 1.2859. Slightly lower, the 1.2800 mark will be watched ahead of the 1.2700 psychological level, a break of which could bring the 200-day SMA and the 23.6% Fibonacci level of 1.2638 under examination.

Summarizing, USDCAD’s progress may further expand in the short term, likely bringing May’s ceiling into focus unless the bar at 1.2875 stands firm.