USDJPY – After Post GDP High, How Much Further Can it Rise

The US dollar is coasting on a post GDP high and USD/JPY is enjoying one of the strongest rallies but better than expected growth was not the only reason for the pair’s gains. Here’s a quick look at the reasons why USD/JPY hit 112:
  1. Better than expected US Q4 GDP
  2. US 10 year Treasury yields hit 1 month highs
  3. Trump extends China trade deadline
  4. Tensions between India & Pakistan ease
  5. Fed Chair Powell expresses optimism on US economy
  6. BoJ talks easing
Last week kicked off with President Trump’s decision to delay the next round of Chinese tariffs. Then came Fed Chair Powell, who could have focused on the red flags in the economy or the possibility of no rate hike this year but he didn’t say anything damaging during his testimony on Capitol Hill. Instead he highlighted the positive outlook for the economy and overall strength of the labor market. During the week the Bank of Japan talked about being open to additional stimulus, which hurt the Japanese Yen and US Q4 GDP beat expectations driving the greenback higher. Tensions between India and Pakistan which could have escalated quickly, eased with the return of an Indian pilot.
It was a busy week for US data and while other economic reports were not as positive as the Q4 GDP report, it was good enough for the Fed fund futures to price in a greater chance of a rate hike than a rate cut this year, something that we haven’t seen for a few weeks now. Ten year Treasury yields also rose to their highest level in a month. The fundamentals are not in favor of the dollar, at least in the near term. GDP growth did not slow as much as economists anticipated in the last 3 months of the year, but it still slowed and growth in the first quarter should be worse as it includes the impact of the government shutdown. We also can’t ignore the fact that many of the other economic reports released this past week reflected weakness in the US economy. This includes housing data, personal income, spending, the trade balance and the ISM manufacturing index and the revisions. The Conference Board Consumer confidence index was higher and manufacturing activity in the Chicago region improved but next week’s employment report won’t be so kind to the dollar. Job growth was unexpectedly strong in the month of January and as a result could pare back in February and the January numbers could also be revised lower. If the ISM and ADP reports flash warning signs for the labor market, USD/JPY could fall back quickly. However if the job market continues to power on USDJPY will make its way up to 114.
Technically, 111 has been an important resistance level for USD/JPY for more than 2 weeks and finally on the back of slower but better than expected growth in the fourth quarter, the pair hit a high of 112, a level not seen since December of last year. This move is important because it also takes the pair above all major moving averages, opening the door for a move to 113 – 114 zone.