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

USD/JPY Analysis and Chart

• USD/JPY clawed back some ground but remains pressured
• Markets are unsure how much further US interest rates will rise as data softens
• Bank of Japan’s ultra-loose monetary policy is also in focus

The Japanese Yen slipped a little against United States Dollar on Friday but still looks set for its strongest week this year as Japanese yields rise and the greenback is weighed down by a broad rethink about how much higher US interest rates could go.

Official data this week showed inflation coming to heel Stateside, with the labor market softening. Seeing this, investors on watch for chunky, half-percentage-point rate rises immediately dialed back their expectations. For sure the general view is that the Federal Reserve will increase borrowing costs again this month. But now only a quarter-point increase is expected. There’s also far more uncertainty about whether there’ll be any more such action this year.

Naturally, this new reality has undermined the US Dollar, especially against currencies like the Euro and Sterling whose central banks have so far been much less successful than the Fed in bringing prices under control.

The Yen is in a monetary category of its own, of course. The Bank of Japan has been trying with limited success to stoke domestic inflation for years and still views the current bout as a product of global factors rather than one which needs a shift in its ultra-loose monetary policy.

Still, general weakness in the US Dollar has been amply reflected in USD/JPY. Moreover, some analysts feel that US yields now have much less room to rise compared to those in Japan, should the BoJ ‘tweak’ its repressive policy of Yield Curve Control. Indeed, ten-year Japanese bond yields hit their highest point for nearly five months on Friday.

The BoJ will give its next policy decision on July 28, two days after the Fed. It will also unveil economic projections. The market is increasingly prepared to bet that the tweak is coming.

USD/JPY Technical Analysis

Chart Compiled Using TradingView

USD/JPY’s collapse since July 5 has been sharp, taking the pair down through both the first and second Fibonacci retracements of its rise from the lows of January to the peaks of this month.

The second retracement at 138.270 has been retaken as of Friday’s European morning but hardly comfortably and it remains under threat.

The pair has also fallen below the uptrend channel dominant since March 24 and so far struggled to regain it. It now provides near-term resistance at 139.087 and it will be interesting to see whether the bulls manage to close this week out back above that point.

Unsurprisingly the Dollar is starting to look more than a little oversold via its Relative Strength Index at this point and some short-term moderation in selling pressure can probably be expected with Dollar bulls likely out to defend the psychological 137.00 support region.

IG’s own sentiment index finds traders quite balanced on the pair’s prospects from here, with 53% still bearish, not a huge margin. It’s also possible that markets are slightly overdoing their fundamental justification to buy the Yen. The BoJ is likely to take a very measured and gradual approach to unwinding any of its monetary easing, assuming it does so at all.

–By David Cottle for DailyFX