USD/JPY hits resistance ahead of big week
The USD/JPY recovered from its earlier lows after the release of some mixed-bag US PMI data but was still unable to make back the losses from earlier in the session. The USD/JPY and yen crosses will be in sharp focus in the second half of the week, with investors looking forward to interest rate decisions from the Fed and BoJ on Wednesday and Friday, respectively.
Ahead of these meetings, we have once again been reminded of the dangers high levels of inflation and interest rates are having on the global economy: Global manufacturing PMI remaining mostly in the contractionary territory.
While the US manufacturing PMI came out stronger than expected, even if it remained in the contraction territory below 50.0, the weaker-than-expected services PMI print of 52.4 means activity at the more dominant sector is moderating.
The USD/JPY rose more than 2% last week to make back most of the losses it had suffered in the week prior. But at the start of this week, this pair has started on the backfoot again, with rates finding resistance from around 141.50 to 142.00.
The Japanese yen sold off last week as investors priced out the potential for a policy change from the Bank of Japan following a Reuters report. The USD/JPY recovered nicely from sub-138.00 levels to climb to just shy of 142.00.
The USD/JPY outlook now hinges more on the decision from the Fed than the BoJ.
But could the BoJ now deliver a surprise and change YCC anyway? If it does, the JPY should surge higher as this is no longer the base case scenario.
FOMC monetary policy decision
Wednesday, July 26
19:00 BST
The USD/JPY is going to move sharply on the back of the Fed’s rate decision, along with other dollar pairs on Wednesday. After 10 interest rate hikes, the Fed kept policy unchanged at 5-5.25% in June in a unanimous decision. However, the Fed made it clear in the policy statement, press conference and dot plots that two more rate increases was pencilled in for the remainder of the year. Since that policy meeting, the Fed official have largely remained consistent with this messaging. It looks like there is strong support among the FOMC for a 25-bps hike at this meeting, which is what everyone now also expects.
But in light of weakening inflationary pressures, investors are now wondering whether this meeting could mark the end of the tightening cycle.
So, a rate increase is a forgone conclusion. The Fed must decide whether to signal the likely need for one or more rate increase or whether to move to a more data-dependant mode. If it is the latter, then the market will see it as a clear signal of a pivot, which should hurt the dollar and undermine the USD/JPY – at least until Friday’s BOJ meeting anyway.
It is also worth noting that until the Fed’s September 20 meeting, there will be two further jobs reports and a couple of inflation reports that could significantly impact the Fed’s decision. So, even if the Fed re-iterates the need to hike more, whether the market will believe them is not a given.
BOJ likely to leave policy unchanged
Last week’s yen sell-off was triggered by a Reuters reported that said the BOJ is not likely to introduce any changes to its yield curve control settings, citing 5 sources familiar with the central bank’s thinking. What’s more, Reuters reports that many BoJ policymakers see no imminent need to phase out the bank’s stimulus measures.
As the yen sold off, the USD/JPY rallied and this helped to lift the Dollar Index above 101.00, which thus made the greenback stronger against other currencies as well. But the yen has started to find some mild support again at the start of this week on fears the Japanese government could intervene after the nation’s top currency diplomat Kanda said excessive FX moves are undesirable and that they are watching FX markets with a sense of urgency.
If we see some sort of government intervention or the BoJ changes YCC anyway, despite reports suggesting otherwise, then the JPY should surge higher as this is no longer the base case scenario.
USD/JPY technical analysis
The USD/JPY reclaimed the 140.00 psychological level decisively last week after holding that long-term support zone around 138.00 where prior resistance and the 200-day average proved too strong a region for the bears to attack. The USD/JPY is now back near 141.50 to 142.00 resistance area, which had held firm at the time of writing. Unless the Fed unexpectedly turns out to be rather dovish or the BoJ changes its YCC settings unexpectedly next week, and barring any surprise intervention from the Japanese government, the dips on the USD/JPY should be supported.
Thursday’s high comes in at 140.50, which is now the first line of defence for the bulls. Below that 140.00 is obviously very important. If the latter gives way, then watch out below.
On the upside, if 142.00 breaks then there are not many further obvious levels until the recent high at just north of 145.00.
Bank of Japan monetary policy
Friday, July 28
04:00 BST
Until Friday’s report from Reuters, there had been lots of speculation doing the rounds that the Bank of Japan could adjust its yield curve control policy further at its next meeting on July 28, after some comments from BoJ Deputy Governor Shinichi Uchida. However, the BoJ Governor Kazuo Ueda indicated otherwise, suggesting there might not be a change in YCC after all. It looks like this is now the base case: inaction, as per Reuter’s report (see above).
By Fawad Razaqzada on behalf of FOREX.com
Ahead of these meetings, we have once again been reminded of the dangers high levels of inflation and interest rates are having on the global economy: Global manufacturing PMI remaining mostly in the contractionary territory.
While the US manufacturing PMI came out stronger than expected, even if it remained in the contraction territory below 50.0, the weaker-than-expected services PMI print of 52.4 means activity at the more dominant sector is moderating.
The USD/JPY rose more than 2% last week to make back most of the losses it had suffered in the week prior. But at the start of this week, this pair has started on the backfoot again, with rates finding resistance from around 141.50 to 142.00.
The Japanese yen sold off last week as investors priced out the potential for a policy change from the Bank of Japan following a Reuters report. The USD/JPY recovered nicely from sub-138.00 levels to climb to just shy of 142.00.
The USD/JPY outlook now hinges more on the decision from the Fed than the BoJ.
But could the BoJ now deliver a surprise and change YCC anyway? If it does, the JPY should surge higher as this is no longer the base case scenario.
FOMC monetary policy decision
Wednesday, July 26
19:00 BST
The USD/JPY is going to move sharply on the back of the Fed’s rate decision, along with other dollar pairs on Wednesday. After 10 interest rate hikes, the Fed kept policy unchanged at 5-5.25% in June in a unanimous decision. However, the Fed made it clear in the policy statement, press conference and dot plots that two more rate increases was pencilled in for the remainder of the year. Since that policy meeting, the Fed official have largely remained consistent with this messaging. It looks like there is strong support among the FOMC for a 25-bps hike at this meeting, which is what everyone now also expects.
But in light of weakening inflationary pressures, investors are now wondering whether this meeting could mark the end of the tightening cycle.
So, a rate increase is a forgone conclusion. The Fed must decide whether to signal the likely need for one or more rate increase or whether to move to a more data-dependant mode. If it is the latter, then the market will see it as a clear signal of a pivot, which should hurt the dollar and undermine the USD/JPY – at least until Friday’s BOJ meeting anyway.
It is also worth noting that until the Fed’s September 20 meeting, there will be two further jobs reports and a couple of inflation reports that could significantly impact the Fed’s decision. So, even if the Fed re-iterates the need to hike more, whether the market will believe them is not a given.
BOJ likely to leave policy unchanged
Last week’s yen sell-off was triggered by a Reuters reported that said the BOJ is not likely to introduce any changes to its yield curve control settings, citing 5 sources familiar with the central bank’s thinking. What’s more, Reuters reports that many BoJ policymakers see no imminent need to phase out the bank’s stimulus measures.
As the yen sold off, the USD/JPY rallied and this helped to lift the Dollar Index above 101.00, which thus made the greenback stronger against other currencies as well. But the yen has started to find some mild support again at the start of this week on fears the Japanese government could intervene after the nation’s top currency diplomat Kanda said excessive FX moves are undesirable and that they are watching FX markets with a sense of urgency.
If we see some sort of government intervention or the BoJ changes YCC anyway, despite reports suggesting otherwise, then the JPY should surge higher as this is no longer the base case scenario.
USD/JPY technical analysis
The USD/JPY reclaimed the 140.00 psychological level decisively last week after holding that long-term support zone around 138.00 where prior resistance and the 200-day average proved too strong a region for the bears to attack. The USD/JPY is now back near 141.50 to 142.00 resistance area, which had held firm at the time of writing. Unless the Fed unexpectedly turns out to be rather dovish or the BoJ changes its YCC settings unexpectedly next week, and barring any surprise intervention from the Japanese government, the dips on the USD/JPY should be supported.
Thursday’s high comes in at 140.50, which is now the first line of defence for the bulls. Below that 140.00 is obviously very important. If the latter gives way, then watch out below.
On the upside, if 142.00 breaks then there are not many further obvious levels until the recent high at just north of 145.00.
Bank of Japan monetary policy
Friday, July 28
04:00 BST
Until Friday’s report from Reuters, there had been lots of speculation doing the rounds that the Bank of Japan could adjust its yield curve control policy further at its next meeting on July 28, after some comments from BoJ Deputy Governor Shinichi Uchida. However, the BoJ Governor Kazuo Ueda indicated otherwise, suggesting there might not be a change in YCC after all. It looks like this is now the base case: inaction, as per Reuter’s report (see above).
By Fawad Razaqzada on behalf of FOREX.com
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