USD/JPY continues to surge on weak yen ahead of key economic events

USD/JPY has been in a sharp climb for the past two weeks, not due to any strength in the US dollar, but because of a pronounced weakening of the Japanese yen. This yen weakness has been due largely to a diminished demand for safe-haven assets like the yen, in a generally “risk-on” market environment mostly devoid of high-risk concerns. Barring any unexpected events on the horizon, this relative complacency is likely to extend the yen’s fall in the near-term, potentially further propping up USD/JPY.

Bullish support for USD/JPY could be even more pronounced if the US dollar responds positively to key economic events scheduled for the remainder of this week. On Wednesday, US employment numbers from ADP were released, showing that 177,000 private non-farm jobs were added in April, which was essentially in-line with prior expectations. Although the ADP report is often considered a precursor to the official non-farm payrolls (NFP) government data, however, it should be kept in mind that for March, ADP showed substantially better-than-expected numbers only to be followed by a colossal disappointment in the NFP (98,000 jobs added in March vs 175,000 expected).

Also on Wednesday, the ISM non-manufacturing (services) PMI data showed a healthy expansion in April at 57.5, better than the 56.1 expected and significantly higher than March’s 55.2 growth. April expansion in non-manufacturing employment was slightly slower but essentially in-line with the previous month at 51.4 vs March’s 51.6.

At this point, the data that has been released supports a relatively solid, but not particularly stellar, outcome for Friday’s NFP number. However, expectations for NFP are currently rather high at around 195,000 April jobs added. In addition, March’s disappointing 98,000 figure is expected by some to be revised higher.

Perhaps more pressing for the US dollar than Friday’s NFP, however, will be the FOMC policy statement scheduled to be released later on Wednesday. Futures markets are still pricing-in less than a 5% probability of a rate hike, which points to a very high likelihood that interest rates will be kept steady. Markets will be focused instead on any indications surrounding both the potential trajectory of rate increases going forward as well as the Fed’s recently-discussed intentions to shrink its massive balance sheet.

Meanwhile, price action continues to show strong bullish momentum for USD/JPY as the yen remains weak, even as the dollar itself has pulled back overall recently. The pair is currently trading above the 112-area, substantially higher than both its 50-day and 200-day moving averages. It is also approaching the upper border of a descending parallel trend channel that extends back to the January highs. If further bullish momentum results in a sustained breakout above this channel, USD/JPY could surge on a breakout extension towards a 115.00 resistance objective.

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