On its longer-term time frames, it can be argued that USD/JPY is still in a solid uptrend as an ascending trend channel can be drawn connecting the latest highs and lows of price action. However, the continuation of this market behavior could hinge on the monetary policy biases of the Federal Reserve and the Bank of Japan.
Both central banks are due to announce their interest rate decisions and possibly make a huge impact on USD/JPY price action in the near term. In their previous rate statement, the FOMC initially sounded hawkish as they carried on with the taper plan and Yellen hinted that the central bank might hike rates around six months after asset purchases end. However, this optimistic outlook was erased when the FOMC minutes showed that most policymakers were still doubtful about the US economic recovery.
On the other hand, the BOJ is also leaning towards the more dovish end as the Japanese economy is dealing with the impact of the recently implemented sales ta hike. The previous round of economic data has shown no signs of weaknesses yet but the freshly released manufacturing PMI and preliminary industrial production data both came in much weaker than expected. In fact, the manufacturing sector reported a contraction already.
At the end of the day though, the Fed remains the more hawkish central bank relative to the BOJ, which is why the fundamental bias for USD/JPY is to the upside. The Fed is more likely to keep tapering asset purchases by $10 billion each month as economic figures from the US highlighted improvements in industrial production and consumer spending.
Market watchers could take a more cautious approach in trading USD/JPY though, as the US economy is still set to release more data in the coming days. The preliminary GDP reading for the first quarter of the year could incorporate the slack in hiring, as the figure could sink from 2.6% in the previous quarter to just 1.2%. The non-farm payrolls report due later on could be a leading indicator of whether more weakness is to be expected or not.
Meanwhile inflation reports from Japan showed signs of progress in terms of warding off deflationary pressures but it remains to be seen whether this improvement can be sustained or not. A break past the 102.75 area for USD/JPY could confirm that the uptrend will continue and that a rally towards the top of the channel around 104.50 could be in the cards.
See more in the USDJPY forecast.
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