USD/JPY bulls take charge as US dollar bursts back into life

• USD/JPY bulls in charge but a correction could be on the cards. 
• The bulls are taking the lead on the back of Fed expectations. 

USD/JPY has soared on the back of a stronger US dollar on Tuesday that rallied against its major trading partners early doors after the long Memorial Day holiday weekend. The data schedule is busy again this week, with the focus on Friday's May employment report. Investors moved away from risk following the US Federal Reserve Governor Christopher Waller's hawkish remarks the prior day.

Subsequently, global equities came under pressure on news of record-high inflation in Europe. The Euro Stoxx 50 and CAC 40 closed 1.4% lower, and the DAX slipped 1.3%. The FTSE 100 posted a modest 0.1% increase. The Dow Jones Industrial Average fell by 0.7% to 32,990.12, the S&P 500 dropped by 0.6% to 4,132.15, and the Nasdaq Composite was 0.4% in the red at 12,081.39. For the month, the S&P and the Dow closed little changed while the Nasdaq was 2.1% lower after registering a more than 13% retreat in April. The US 10-year yield rose 10.2 basis points to 2.85%.

The Fed official Waller advocated for the central bank to raise interest rates at every meeting until inflation is curbed. Specifically, Waller said “I support tightening policy by another 50 bp for several meetings. In particular, I am not taking 50 bp hikes off the table until I see inflation coming down closer to our 2% target.”    

Consequently, the analysts at Brown Brothers Harriman explained that WIRP suggests 50 bp is fully priced in for June and July. ''However, a third 50 bp that was fully priced in for September is now about 50% priced in vs. 35% last week.  After September, two more 25 bp hikes are fully priced in and a third is partially priced in that would take the Fed Funds ceiling to between 3.0-3.25%.''

 What’s really changed is that rates are seen peaking in mid-2023 before falling in H2 23 and beyond, the analysts added. ''This would only happen if the US were to fall into recession next year and while it is possible, it is not our base case. This week’s data will be very important for near-term market expectations.''

The Nonfarm Payrolls and other important survey data will be reported. We get the regional Fed manufacturing surveys wrap-up and May ISM manufacturing PMI will be reported tomorrow and is expected at 54.5 vs. 55.4 in April. 

We also have US President Joe Biden who said he and Jerome Powell will discuss inflation in a White House meeting Tuesday and pledged to give the Federal Reserve chair space to do his job.

• Biden and Powell to discuss inflation, US dollar on a knife's edge

USD/JPY technical analysis

The price is meeting a daily resistance area and could be on the verge of a bearish correction to the 38.2% Fibo that meets prior resistance that would be expected to act as a support.