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USD/JPY: Fundamental Outlook and Next Target Setup

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During the Asian session, the USD/JPY pair broke below the crucial support level of 140.00. This decline was influenced by the movement of the US Dollar Index (DXY), which also experienced a correction, falling close to 104.11 after failing to maintain a recent two-month high at 104.31. The correction in the USD/JPY pair appears to be more significant compared to the correction in the USD index, indicating that the Japanese Yen has gained some strength.

In the Asian session, S&P500 futures continued to decline, reflecting an increase in risk aversion. However, on Thursday, US equities saw significant buying, driven by a strong recovery in the technology and financial sectors. Nevertheless, investors are becoming anxious as negotiations between White House officials and Republican leaders seem to be never-ending, which puts the US economy at risk of approaching a default situation.

Fears of a US economic default are leading to higher US Treasury yields, with the yields on 10-year government bonds surpassing 3.83%.

On Friday, there is expected to be significant activity in the USD Index with the release of US Durable Goods Orders data for April. The economic data is projected to contract by 1.0% compared to the previous reported expansion of 3.2%.

Federal Reserve policymakers are in support of not raising rates in June. Several economic indicators in the US economy are suggesting a need for the Federal Reserve (Fed) to pause its policy-tightening measures during the June monetary policy meeting. Labor market conditions in the US have started to cool down, the Consumer Price Index (CPI) is consistently decelerating, and businesses are anticipating a gloomy economic outlook. Reuters reported on Thursday that weekly emergency lending by the Federal Reserve to banks has reached its lowest level since the banking sector faced difficulties in March. This indicates that companies are using their retained earnings to meet their working capital requirements and avoid higher interest rates, or they are operating at reduced capacity.

Investors should take note of the minutes from the May Federal Open Market Committee (FOMC) meeting, which revealed that several Federal Reserve policymakers expressed uncertainty about further interest rate increases due to tight credit conditions imposed by regional US banks.

Expectations of the Fed maintaining its rate-hiking cycle in June solidified further after dovish comments from Boston Federal Reserve Bank President Susan Collins, who stated that the Federal Reserve "may be at or near" the time to pause interest rate increases. She added, "While inflation is still too high, there are some promising signs of moderation."

The Bank of Japan (BoJ) could make adjustments to its Yield Control Curve (YCC) strategy in the near future. BoJ Governor Kazuo Ueda stated on Thursday that they might tweak the YCC strategy if the balance between its benefits and costs were to change. The BoJ has also left room to potentially shorten the duration of bond yield targets from the current 10-year zone to a 5-year zone as part of the YCC.

Additionally, the Japanese Yen strengthened after the release of Tokyo CPI data for May, which showed a deceleration. Headline inflation eased from the previous release of 3.5% to 3.2%, falling short of expectations for an acceleration to 3.9%. However, core CPI, which excludes oil and food prices, decreased to 3.9% compared to estimates of 4.3%, but it remained higher than the previous release of 3.8%.

Our idea is to initiate a long setup at the 61.8% retracement level of the Fibonacci sequence, aiming to capitalize on a new long position aligned with the prevailing trend.

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