We’ve got top tier U.S. economic data coming up that could spark short-term moves for the Greenback , making the consolidation pattern on USD/JPY something to watch this week.
On the one hour chart of USD/JPY above, we can see that the market has been leaning in favor of the Japanese yen through the latter half of February, likely influenced by broad risk-off sentiment as the Russia-Ukraine situation escalated.
Over the past two sessions, though, the bulls have recovered and the market has fallen into a lull, likely reflecting shorts taking off some profits ahead of two major U.S. economic data points coming soon.
First is the preliminary U.S. GDP read coming on Thursday, followed by the Core PCE Price Index (the Federal Reserve’s preferred inflation gauge) on Friday.
Pippo discussed both events earlier this week in the “Week Ahead in FX” post, pointing out expectations that the 2021 Q4 GDP read will likely come in much higher than 2021 Q3 at 7.0%, and that the core PCE Price Index will likely be flat at a 0.5% m/m read.
If the actual numbers coming in higher than these expectations, then that raises the odds of traders pricing in an aggressive monetary policy tightening stance ahead from the Fed. That in turn, raises the odds of an upside move in the Greenback, making an upside break of the consolidation the behavior to see before considering a long position.
Now, if both numbers disappoint and show stabilizing inflation rates and a possible peak in economic growth, then that could spark traders to lighten up on Dollar long positions. This could lead to a downside break on the USD/JPY consolidation area, which could have some legs given the broad downtrend that USD/JPY has been.
Of course, we’ll also have to pay attention to geopolitical headlines this week before considering any kind of trades as Ukraine has dominated market sentiment for the past week or so. If the situation continues to worsen and lead to an elevated level of military engagement, it’s likely the Japanese yen will beat out the Greenback as traders run to safe havens in the short term. And vice versa, if we see a peaceful resolution in Ukraine, positive risk sentiment could rip higher, sparking a sell-off in the yen.
Either way, that makes the consolidation pattern in USD/JPY a great way to play any spike in volatility sparked by geopolitical developments.
What do y’all think? Is the consolidation in USD/JPY set to break out or will we see choppiness into the weekend? Please let us know in our comment section below!
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