Strengthening data from the US amid disappointments in other corners of the world is behind the recent wave of shortening of short positions in USD, hence today's report on the market is important for the further direction not only of the currency market but also the general attitude to risk. Especially stressing the discrepancy in the pace of recovery between the US and the EU turns upside down the whole assumptions behind trade at the beginning of the year. In recent days, the FOMC message did not add fuel to the fire because it emphasized the "symmetric" approach to the inflation target of 2.0% suggests the Fed's flexibility if inflation comes up higher. However, the valuation of approx. 1.5 increases for 2019-2020 already shows the already gentle market approach to the prospects of future Fed policy, so there is more room for hawkish changes. The weaker ISM is also not a cause for concern as it fits into global trends, yet US rates are higher than in other leading economies.
The NFP report may have a stronger rebound in asset prices. If the market is seriously considering the fourth interest rate hike, the Fed must first receive evidence of the intensification of inflationary pressure, which seems to be accelerated wage growth. The consensus for April data is 0.2% m/m, which stabilizes the annual dynamics at 2.7%, thus below the peak of 2.8% from January. For the reactivation of the rally the USD bulls will, therefore, need a result of 0.3% or higher. In addition, after a six-month stop, the unemployment rate at 4.1%. the time has come to respond to the increase in employment by 1.27 million in this period. If the drop is stronger than 4.0%, it will be an additional hawkish signal. The employment dynamics, after the last swing caused by unruly weather, should return to normal, which means a reading in the range of 150k-200k (versus expected 192k).
Let's take a look at the USD/JPY technical picture at the H4 timeframe before the NFP data release. Even if the report would go below the market expectations (but not to the extreme), all that is needed is a correction of the last US dollar, but one reading is not enough to worry the Fed or to stop structural changes in investors' attitudes towards the dollar. With weak wages, risky assets can catch their breath, but too much disappointment will raise fears of a global slowdown, which will put aversion to risk. Therefore, even in this case, the USD may come out with a defensive hand (as a safe haven), although JPY will probably be the biggest winner in this case. On the USD/JPY chart, the momentum is clearly pointing to the downside as the market is testing the local technical support at the level of 108.97. Any breakout low will open the road towards the level of 108.54 and 108.43. On the other hand, the nearest technical resistance is seen at the level of 109.58 and at the swing high at the level of 110.03.
