Short-term swings in the USD/JPY pair at the start of the week reflect several forces acting mainly on the US dollar. Last Friday, provided mild support to the US dollar. Even so, it remains difficult to argue that a broader trend shift is underway, particularly given the sizeable downward revisions seen in recent months.
At the same time, the growing clash between President Donald Trump and Federal Reserve Chair Jerome Powell is weighing on the US dollar. The threat of criminal charges linked to the renovation of federal buildings has unsettled markets, though many view this as an effort to push the towards faster interest rate cuts.
From a technical perspective, however, the current setup continues to favour further upside, pointing to potential US dollar strength against the Japanese yen.
The Fed, Iran, and Inflation in the Spotlight
The allegations against the Federal Reserve chair are one reason the US dollar has weakened, but their impact should not be overstated. Jerome Powell’s term ends in six months, so the influence of political pressure on the Fed leadership is likely to fade as that date approaches. That said, markets may still react if the situation escalates or new developments emerge.
A more important factor for the US dollar appears to be developments in Iran. Ongoing anti-government protests and the possibility of US military involvement have increased geopolitical risk and added uncertainty to markets.
Looking ahead, today’s will be a key short-term driver for the US dollar. Market expectations point to no change from the previous month, with inflation forecast to remain at 2.7% year on year.
The 2 Sides of the US Labor Market
At first glance, the labour market data released on Friday looked reasonably solid. The came in at 4.4%, slightly below the market forecast of 4.5 percent. Non-farm payrolls also missed expectations, but only marginally, with a gain of 50,000 jobs, which on its own would not be seen as a major setback.
The bigger concern lies in the revisions to earlier data. A combined 76,000 jobs were removed from the October and November figures. Taken together, this suggests the US economy has struggled to generate meaningful job growth since the middle of last year.
Under these conditions, with inflation holding below 3% year on year, further interest rate cuts in the US this year appear justified.
USD/JPY Breaks Above Key Triangle Resistance
The ascending right-angled triangle that has been forming since mid-November last year is now playing out. Price has broken above the upper boundary of the pattern, which sits around 158 yen per dollar.
The main target for buyers sits at the long-term highs above 160 yen per dollar. A return to these levels would likely revive debate over possible currency intervention by the Bank of Japan.
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