Is USD/JPY starting its rebound toward new cycle highs? Eyes on the Middle East and US CPI
USD:
The US dollar sold off across the board in the final part of last week. The initial weakness came from the FOMC rate decision as the extra dissent from Fed’s Kashkari wasn’t taken as a major hawkish surprise.
On Thursday, we had heavy dollar-selling flows stemming from interventions by Japan and South Korea. The losses then extended on Friday when reports confirmed that US Treasury participated in the intervention, the first joint operation since 2011. Moreover, both Japan's Ministry of Finance and US Treasury Secretary Bessent have said that they will not hesitate to conduct more joint interventions in the future.
Given that USD/JPY is now trading around April-May levels, there’s a low probability of another intervention in the near-future, so the greenback should go back trading on fundamentals.
Overall, the fundamentals haven’t changed much, so it’s just about waiting for the US CPI and further US-Iran developments. A de-escalation would keep the greenback under pressure on easing inflationary worries and lower rate hike probabilities. An escalation, on the other hand, should continue to support it on Fed tightening risks. Finally, a hot CPI would probably seal a rate hike at the September meeting.
JPY:
On the JPY side, the currency appreciated massively in the final part of last week following joint intervention between Japan’s MoF and the US Treasury. The moves were also likely exacerbated by a rare South Korea intervention. Throw into the mix month-end flows and overstretched positioning and you get a very volatile price action.
Yesterday, we got another push lower in the USD/JPY pair, but BoJ data suggests there was no intervention, with just low liquidity conditions likely affecting the price action. The Monday’s drop has been already fully erased as speculators continue to pile back in after the intervention offered much better prices.
Without a change in the fundamentals, the interventions will continue to be just clearing events to rebuild positions at better levels. The trend is unlikely to change without a dovish repricing in Fed interest rate expectations or a faster BoJ tightening pace.
USDJPY TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that USDJPYdropped all the way back to the key 155.00 handle after breaking below the major trendline. The buyers stepped in around the 155.00 level with a defined risk below it to position for a rally back into new cycle highs. The sellers will need the price to break below the 155.00 handle to open the door for a drop into the 152.00 level next.
USDJPY TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see the price is pulling back into the broken trendline which will now act as resistance. We can expect the sellers to step in around the resistance with a defined risk above it to keep pushing into new lows. The buyers, on the other hand, will want to see the price breaking higher to increase the bullish bets into new cycle highs.
USDJPY TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we have a minor upward trendline defining the current pullback. The buyers will likely continue to lean on the trendline with a defined risk below it to keep pushing into new highs, while the sellers will look for a break to pile in for a drop back into the 155.00 handle. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Today, we get the US Job Openings data. Tomorrow, we have the US ADP and ISM Services PMI. On Thursday, we get the latest US Jobless Claims figures. On Friday, we conclude the week with the US NFP report. The US-Iran developments will remain in focus.
This article was written by Giuseppe Dellamotta at investinglive.com.
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