Ready for New Bullish Breaches

The sharp upward trajectory of the performance of the USD/JPY currency pair reached the 131.25 resistance level, the highest in 20 years. At the end of last week’s trading, the currency pair fell to the level of 129.31 after announcing the unexpected contraction of the US economy in the first quarter. This led to the decline of the US dollar against the rest of the other major currencies, but any weakness is still seen as temporary, as economists say that the economy must return to healthy growth.

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All US dollar pairs and markets are on an important date this week, as the US Federal Reserve will announce an increase in US interest rates for the first time since 2018.

The dollar pared fresh multi-month highs against sterling and multi-year highs against euro and yen on news that the US economy contracted 1.4% qoq in the first quarter. The market had expected the economy to grow by 1.1% on a quarterly basis. Commenting on this, Joe Manimbo, chief analyst at Western Union Business Solutions says, “The US dollar gave up some of its strength after the worrying news of growth in the first quarter.”

The dollar index is a broad measure of the currency according to a basket of US dollar exchange rates – has been steady below multi-year highs of 103.80 in the wake of the numbers. Meanwhile, strong GBP/USD selling was halted near 1.2436, with EUR/USD flat at 1.04. “The sudden contraction in growth has the dollar ready for some profit taking after its amazing strength exploded this week,” the analyst adds. Earlier, “the dollar made its way to highs as it remained the preferred currency in the face of mounting concerns about global growth.”

Certainly, it is too early to end the dollar’s rally and the Forex markets will remain on the alert for further gains.

Looking at the details of the GDP release, there is no major cause for concern regarding the outlook. In fact, final domestic demand was still growing well at 2.6% and consumer spending increased by 2.7% during the quarter. “Where the economy faltered was producing goods,” says economist Avery Shenfield of CIBC Capital Markets. “This has accelerated business investment spending, which is a sign of confidence about future demand that matches the desire to add workers,” he explains.

He notes that the increase in imports has been a drag on GDP as companies replenish stocks, buoyed by improvements in global supply chains during the quarter.

The drop in GDP is not as bad as it seems, says Daniel Vernazza, chief international economist at UniCredit in London. This is because the biggest factors detracting from GDP in Q1 22, net exports and inventories, are also the most volatile components and are likely to improve in the coming quarters.

He notes that with rising inflation, consumers seem to finance consumption by indulging in the savings accumulated during the pandemic. But “at some point, Americans are going to start cutting back on demand unless prices start dropping again.” However, CIBC capital markets expect a return to healthy growth over the next two quarters, as net trade and inventories are unlikely to be equally negative, and crucial to the dollar’s outlook, the Fed is unlikely to be affected by a GDP disappointment.

Inflation is rising rapidly, and they will look at the data and choose to raise interest rates by 50 basis points in the upcoming meetings.

This would provide the dollar’s exchange rates with an ongoing yield boost.

According to the technical analysis of the currency pair: In the near term and according to the performance of the hourly chart, it appears that the USD/JPY currency pair is trading within the formation of a descending channel. This indicates a strong short-term bearish momentum in the market sentiment. Therefore, the bears will look to extend the current series of declines towards 129.38 or lower to 128.88. On the other hand, the bulls will target channel breakout profits at around 130.36 or higher at 130.91.

In the long term, and according to the performance on the daily time frame, it appears that the USD/JPY is trading within the formation of a sharp ascending channel. This indicates a strong long-term bullish momentum in the market sentiment. Therefore, the bulls are looking to extend the current gains towards the 131.30 resistance or above to the 133.30 resistance. On the other hand, the bears will be looking for potential reversals at around 128.43 or lower at 126.51.