USDJPY drops due to difference between US and Japanese economic situations

USDJPY continues its decline that started on January 10. On Wednesday, the daily volatility amounted to 1.5%. On Thursday, trading opened at 152.594, showing a decline of 3.8% compared to the beginning of January.

The decline was caused by a number of factors, including positive economic data from Japan and weak readings from the US. The recent Japanese wage growth data had a significant impact on the currency markets. Workers' real wages rose for the second consecutive month despite inflation accelerating to 3.6%. These positive economic indicators reinforced expectations of further interest rate hikes by the Bank of Japan, which supported the Japanese yen.

In light of these data, the US dollar weakened against the yen. USDJPY showed a significant decline as traders revised their forecasts for the Bank of Japan's monetary policy. The two-year interest rate differential between the US and Japan hit its lowest level in four months, pointing to a declining advantage for the US currency.

The weakening of the US dollar was reinforced by weak economic data from the US. According to the FRB Atlanta estimate, the nation's real GDP grew just 2.9%, significantly lower than the projected 3.9%. This can be perceived as a sign of slowdown in economic activity, which negatively affects the USD exchange rate. Also, data on the US trade balance was published: the deficit amounted to $98.4 bln, less than forecasted, but higher than the previous month's value. A larger trade deficit continues to put pressure on the dollar, reflecting weakness in the country's foreign trade. In addition, the decline in ISM Non-Manufacturing Prices may signal a reduction in inflationary pressure.

Reduced trade tensions after Trump's decision to postpone tariffs on goods from Mexico and Canada helped push US Treasury bonds lower. This event shifted investors' attention to fundamentals, such as a slowdown in the country's economic activity. Experts say Trump's policies help reduce demand for the dollar as a safe-haven currency, which also supports the yen.

The next important event will be the release of the US Non-Farm Payroll Change data on Thursday. Unemployment data can also be expected on this day.

Technical analysis shows the bearish trend in the USDJPY market. The MACD indicator shows that the bullish trend has ended and bears are now dominating the market. The RSI indicator shows a price decline, but there is no reason to say that the market reached an oversold condition.

Current recommendation:

Sell USDJPY at the current price. Take profit — 150.990. Stop loss — 153.500.