It says a lot when consistently softer economic data can’t bring down a currency. The U.S. dollar refuses to fall despite clear evidence of a slowdown in the recovery. We’ve seen consumer spending drop for the second month in a row, consumer price growth decline for the first time in more than a year, job growth slow to 98K in the month of March and manufacturing activity in the NY region almost grind to a halt in April. This deterioration drove the odds of a June rate hike down to 47% and the chance of tightening in September down to 67.5%. To put this into perspective, at the beginning of the month, the market saw an 80% chance of a rate hike in September. With this in mind, the U.S. dollar and U.S. rates should be trading lower but instead of breaking 108, USD/JPY held support and even broke above 109 intraday. It can be argued that the greenback is taking its cue from yields but on Tuesday, when 10 year rates hit 5 month lows, USD/JPY drifted only slightly lower. We can pound the table about how the dollar should be trading lower but its obviously not and that is a reflection of the bids below 108. On a technical basis, USD/JPY found support right at the 50-week simple moving average.

Technically, USD/JPY is toying with the 200-day SMA on the daily chart. For the time being 109.20 is the level to watch. If USD/JPY breaks above 109.20, it should rise quickly to 110. However the longer it holds below this level and the lower the lows, the greater the chance of a move back down to the 50-week SMA near 108.30.