USD/JPY Edges Up After Bruising Week, Japanese Yields Rise

Analysis and charting of the USD/JPY pair

• US dollar / Japanese yen He regained some ground but kept pressing on
• Markets are unsure how far US interest rates will rise with weak data
• The Bank of Japan is very loose Monetary policy He is also in focus

The Japanese Yen fell slightly against the US Dollar on Friday, but still looked set for its strongest week of the year as Japanese yields surged and the US dollar took a hit on a broad rethink about how high US interest rates should go.

Official data this week showed that inflation is coming on the heels of the United States, with the labor market slumping. Seeing this, investors who had been watching big interest rate increases by half a percentage point immediately backtracked on their expectations. Certainly, the general view is that the Fed will increase borrowing costs again this month. But only a quarter point increase is now expected. There is also greater uncertainty about whether there will be more such measures this year.

Naturally, this new reality has undermined the US dollar, especially against currencies like the euro and pound sterling whose central banks have so far been far less successful than the Fed in controlling prices.

Of course, the yen is a currency denomination of its own. The Bank of Japan has been trying with limited success to stoke domestic inflation for years and still views the current game as a product of global factors rather than an outcome requiring a shift in its ultra-loose monetary policy.

However, the overall weakness in the US dollar has been heavily reflected in the USD/JPY. Moreover, some analysts feel that US yields now have much less room to rise than those in Japan, if the Bank of Japan “adjusts” its repressive yield curve control policy. In fact, the 10-year Japanese bond yield hit its highest point in nearly five months on Friday.

The Bank of Japan will give its next policy decision on July 28, two days after the Fed. It will also unveil economic forecasts. The market is increasingly preparing to bet that an adjustment is coming.

Technical analysis of the USD/JPY pair

Chart compiled using TradingView

USD/JPY’s collapse since July 5 has been sharp, sending the pair down through the first and second Fibonacci retracement of its rally from January lows to this month’s highs.

The second rebound at 138.270 has been recovered as of Friday morning in Europe but not comfortable and still under threat.

The pair also fell below the prevailing uptrend channel since March 24th and is struggling so far to recover it. It now offers near term resistance at 139,087 and it will be interesting to see if the bulls manage to close this week back above that point.

Unsurprisingly, the dollar is starting to appear slightly oversold by the RSI at this point, and it is likely that we should expect some short-term moderation in the selling pressure, as the dollar bulls are likely to exit to defend the 137.00 psychological support area.

IG’s sentiment finds that traders are quite balanced regarding the pair’s prospects from here, with 53% still bearish, not by a huge margin. It is also possible that the markets are slightly exaggerating their fundamental justification for buying the yen. The Bank of Japan will likely take a very measured and gradual approach to winding down any monetary easing, assuming it does so at all.

– By David Cottle for DailyFX