USD/JPY Analysis: Post-BoJ slump stalls near 138.00, focus shifts to US PCE Price Index

The USD/JPY pair plummets around 300 pips from the Asian session swing high, near the 141.00 mark, and dives to a nearly two-week low in reaction to somewhat hawkish message from the Bank of Japan (BoJ). The Japanese central bank decided to leave its overnight interest rate unchanged at an ultra-low level of -0.1% and stressed the need to maintain monetary support. The BoJ added that more time was needed to sustainably achieve the 2% inflation target, though took steps to make its Yield Curve Control (YCC) policy flexible, underscoring concerns over the rising side- effects of prolonged monetary easing. The central bank said that the 0.5% cap on the 10-year Japanese government bond yield will now be "references" rather than "rigid limits" and that it would step in the markets at a yield of 1.0%. This is seen as a step towards the end of the BoJ's dovish stance and pushes the 10-year JGB yield to its highest level since September 2014, which provides a strong boost to the Japanese Yen (JPY) and prompts aggressive intraday selling around the major.

The USD/JPY pair, however, finds decent support near the 138.00 mark and for now, seems to have stalled its sharp decline in the wake of some follow-through US Dollar (USD) buying. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, climbs to a nearly three-week high and continues to draw support from Thursday's upbeat US macro data. The  US Commerce Department reported on Thursday that the world's largest economy grew by a 2.4% annualized pace during the April-June quarter. Moreover, the Initial Jobless Claims unexpectedly fell to 221K in the week ended July 22. This points to an extremely resilient US economy and supports prospects for further tightening by the Federal Reserve (Fed). It is worth recalling that Fed Chair Jerome Powell, after lifting borrowing costs to the highest level since 2001, had said that the economy still needs to slow and the labour market to weaken for inflation to credibly return to the 2% target. This remains supportive of a further rise in the US Treasury bond yields and underpins the USD.

The market focus now shifts to the release of the US Core PCE Price Index, the Fed's preferred inflation gauge, due later during the early North American session. In the meantime, a generally positive tone around the equity markets could weigh on the safe-haven JPY and act as a tailwind for the USD/JPY pair, which has now bounced back above mid-139.00s. Nevertheless, spot prices remain on track to end in the red for the third week in the previous four as investors now look forward to next week's important US macro data scheduled at the beginning of a new month, including the NFP report.

Technical Outlook

From a technical perspective, weakness back below the 139.00 mark now seems to find some support near the 138.70-138.65 horizonal zone. Any subsequent decline might continue to attract some buyers near the 138.00 round figure. This should help limit the downside for the USD/JPY pair near the 100-day Simple Moving Average (SMA), currently pegged near the 137.40-137.35 area. This is followed by the 137.00 mark and the very important 200-day SMA, around the 136.75 region. A convincing break below the latter will be seen as a fresh trigger for bearish traders and pave the way for the resumption of the recent corrective decline from the 145.00 psychological mark touched in June.

On the flip side, any subsequent move up might confront some resistance near the 140.00 round- figure ahead of the 140.50-140.55 region and the daily swing high, around the 141.00 mark. Some follow-through buying will suggests that the recent decline witnessed since the beginning of the current week has run its course and allow the USD/JPY pair to make a fresh attempt to conquer the 142.00 level.