USD/JPY, EUR/JPY mean revert higher as yen bulls loosen their grip

A late-bout of US dollar selling in Tuesday’s US session helped bolster the euro and British pound, although there were was no obvious trigger. But it could be tied back to positive headlines from Ukraine, with Zelensky willing to negotiate a land exchange with Russia and US Treasury Secretary Bessent set to visit Ukraine this week to discuss energy and rare-earth deals, which could point to early signs of an end to the war.

The euro was up against all FX majors barring the British pound, while the Japanese yen and Swiss franc were the weakest FX majors. This allowed some mean reversion to occur against last week’s hawkish-BOJ bets, with GBP/JPY rising 1%, EUR/JPY up 0.9% and USDF/JPY gaining 0.3% on the day.

Several yen pairs recovered back above their December lows as bullish mean reversion kicked in during a mild risk-on session
USD/JPY might outperform the yen pairs today if US CPI comes in hot, and because it remains well above its December low
Positive headlines surrounding Russia and Ukraine could benefit EUR/JPY bulls further over the near term, though my longer-term bias remains bearish for the year
GBP/JPY upside could be capped due dovish BOE implications
CHF/JPY remains the underperformer and seems likely to remain the underperformer, given the SNB’s dovish stance and increased prospects of two more BOJ hikes this year

It seems the Fed remain in wait-and-see mode regarding interest rates, and there is no guarantee their next move would be lower. When senators specifically asked Powell on whether Trump’s tariffs could lead to higher commodity prices and therefore inflation, he replied that while free trade makes logical sense, “it’s not the Fed’s job to make or comment on tariff policy”, but it is their job to react in sensible ways.

This suggests hikes are on the table should Trump’s policies revive inflation, though that doesn’t make it a base case at this time. Jerome Powell also reiterated the Fed’s stance that they are in no rush to cut rates when speaking to the House Financial Services Committee on Tuesday, and spoke of a strong economy.

Separately, FOMC member Williams thinks that the Fed’s “modestly restrictive policy should return inflation to 2%” and seems “inflation hanging around 2.5% this year” before dropping to 2%.

See my longer-term views on AUD/JPY, EUR/JPY and GBP/JPY

Economic events in focus (AEDT)

10:50 – JP M2, M3 money stock (BOJ)
11:30 – AU home loans, housing finance
17:00 – JP machine tools orders
21:00 – CN M2 money stock, new loans, outstand9ing loan growth, social financing
21:00 – ECB Elderson speaks
00:30 – US CPI
02:00 – US Fed chair testifies

USD/JPY technical analysis:

Prices are reverting higher from last week’s lows ahead of today’s US inflation report. And USD/JPY could go on to retest the January high should core CPI come in hotter than the 0.3% m/m expected. But with expectations for inflation to rise already in place, the bigger move could be to the downside should it come in 0.2% m/m or lower (particularly if we’re treated to a 0.1% print).

There is a cluster of technical resistance on USD/JPY between 152.41 – 153 that could tempt bears into swing trades shorts, who likely have the 150 handle within their bearish sights. Though take note of the monthly S2 pivot at 150.7 that makes a likely interim support level.

A break above 153 paves the way more a retest of the January high at 153.7.

EUR/JPY technical analysis:

A longer-term head and shoulders top pattern remains in play on EUR/JPY’s weekly chart, but for now momentum has turned convincingly higher on the 4-hour timeframe.

A higher high and higher low have formed to suggest a swing low arrived after the open this week. The 4-hour RSI (14) is also back above 50 to support the bullish move. With the potential for positive headlines to arrive from US-Ukraine talks this week, EUR/JPY bulls could benefit further.

The 159 handle makes a potential interim target for bulls, with a weekly VPOC (volume point of control) sitting a tad higher at 159.29. But a truly bullish catalyst amid a risk-on environment could see bulls try to close the ‘Deep Seek’ gap resistance level at 160.78. Note that the January VPOC sits right near the monthly pivot point at 161.63, potentially making it a solid level of resistance for longer-term bears to consider.

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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