Key Insights
- USD/JPY faces volatility due to geopolitical tensions and potential Japanese intervention
- US Dollar strengthens on risk aversion, while softer US inflation data raises Fed rate cut expectations
- Technical analysis shows weakening bullish trend with USD/JPY hovering around 158.00
USD/JPY Fundamental Outlook
The Japanese Yen is facing downward pressure on Monday as the US Dollar strengthens, driven by increased risk aversion following the attempted assassination of former US President Donald Trump on Saturday. This event has sparked speculation about potential “Trump-victory trades,” which could further bolster the US Dollar and steepen the US Treasury yield curve.
Adding to the Yen’s volatility is the possibility of intervention by Japanese authorities. Recent data from the Bank of Japan suggests that Japanese officials may have spent between ¥3.37 trillion to ¥3.57 trillion last Thursday to curb the Yen’s rapid depreciation.
However, the Yen had experienced a rally on Thursday, moving away from its 38-year lows. This uptick was primarily due to a weakening US Dollar following the release of data showing moderated US consumer prices for June. This development has heightened expectations for a potential Federal Reserve interest rate cut as early as September.
Market sentiment, as reflected by CME Group’s FedWatch Tool, now indicates an 88.1% probability of a 25-basis point rate cut at the September Fed meeting, up from 72.2% just a week prior.
Analysts are closely monitoring these developments. ING’s FX analyst Francesco Pesole notes a shift in Japan’s Ministry of Finance FX intervention strategy, while UBS FX strategists point out that speculative investors currently hold near-record short positions on the Yen. BBH FX strategists highlight growing concerns among Federal Reserve officials regarding weaknesses in the US labor market.
Japanese officials continue to signal their readiness to act on forex matters. Chief Cabinet Secretary Yoshimasa Hayashi has stated his preparedness to use all available measures, while Finance Minister Shunichi Suzuki emphasized that rapid foreign exchange movements are undesirable.
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USDJPY Technical Analysis
Turning our attention to the technical aspects of USD/JPY, the pair currently hovers around the 158.00 mark, a level that has become a focal point for traders and analysts alike. The daily chart reveals a nuanced picture, with signs of a weakening bullish trend becoming increasingly apparent. The breakdown below the lower boundary of the ascending channel pattern serves as a testament to this shift in momentum.
Adding weight to this bearish sentiment, the Relative Strength Index (RSI) on the 14-day timeframe has dipped below the crucial 50 level. This technical indicator suggests a waning of bullish momentum, potentially paving the way for further downside in the near term.
Should this downward pressure persist, market participants would be wise to keep a close eye on the support level near June’s low of 154.55. This key level could prove to be a litmus test for the pair’s short-term direction.
However, it’s important not to discount the potential for a bullish resurgence. The immediate resistance looms at the 14-day Exponential Moving Average (EMA), currently situated around 159.75. A decisive break above this level could reignite bullish sentiment, potentially propelling the pair back into the confines of the ascending channel.
