The USD/JPY exchange rate retreated below the support level of 144 as traders reflected on last week’s Bank of Japan (BoJ) interest rate decision and the upcoming Federal Reserve meeting. It has slipped a bit from this month’s high of 145.91. This article explains why the cup and handle pattern points to further USDJPY retreat.
Federal Reserve decision ahead
The most important USD/JPY news of the week will be the Federal Open Market Committee (FOMC) meeting on Wednesday.
This will be an important meeting to watch as it comes at a time when officials are under pressure from the US president to slash interest rates.
Economists are unanimous that the Fed will neither cut nor hike rates in this meeting as officials observe the impact of tariffs on the US economy.
The most recent data show that US inflation was moving downwards before the Liberation Day tariff speech. A report released on Wednesday last week revealed that the core Personal Consumption Expenditure (PCE) dropped to 2.6%, the lowest level in months.
The most recent US consumer price index (CPI) also retreated to 2.4% in March. While these numbers are good, the Fed is waiting for the impact of tariffs on US prices before making its next move.
Some companies have already started hiking prices. For example, Temu and Shein have boosted prices on items by over 100% after the end of de minimis. Also, Amazon wanted to display tariffs on its Haul platform until Jeff Bezos intervened following pressure from Donald Trump.
Wall Street analysts believe the Federal Reserve will deliver at least three interest rate cuts this year. Goldman Sachs analysts see the first cut coming in July this year.
The Fed decision comes a week after the US published mixed economic numbers. A report by the Bureau of Labor Statistics (BLS) show that the economy created 177k jobs in April, much higher than analysts expected.
Another report showed that the US GDP contracted by 0.3% as imports surged. US consumer confidence also plunged.
BoJ interest rate decision
The USD/JPY exchange rate also reacted to the Bank of Japan interest rate decision last week.
The bank left interest rates unchanged at 0.5% and hinted that it would maintain them for a while as it observed the impact of tariffs on the economy. Kazuo Ueda, the head of the BoJ said:
“We’ll enter a period in which both inflation and wage growth will likely slow somewhat. But we expect a positive cycle of rising wages and inflation to continue due to a severe labour shortage. It’s hard to judge now when we can see the likelihood of our scenario being achieved.”
The BoJ is also waiting for a potential breakthrough in talks between the United States and Japan. Trump implemented substantial tariffs on Japan, which could derail its economy since it sold goods worth $148.2 billion, giving it a trade surplus of $64 billion.
USD/JPY technical analysis
The daily chart shows that the USD/JPY exchange rate was trading at 144 on Tuesday. It has remained below the 50-day and 100-day Exponential Moving Averages.
Most importantly, the pair has formed an inverse cup and handle pattern, a popular bearish continuation sign in the market. The recent price action is part of the formation of the handle section.
Therefore, the pair will likely continue falling as sellers target the key support at 139.95, the lower side of the cup. A drop below that level will point to further downside, potentially to 138 later this year. A move above the resistance point at 145.91 will invalidate the bearish outlook.
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