Fundamental Forecast for Japanese Yen: Bearish
Japanese Yen Talking Points:
USD/JPY is under pressure following the semi-annual Humphrey-Hawkins testimony as President Donald Trumpwarns that a strong dollar is ‘taking away’ the competitive advantage of the U.S. economy, but the Federal Reserve’s hiking-cycle may continue to foster a long-term bullish outlook for the exchange rate as the central bank appears to be on course to implement higher borrowing-costs over the coming months.
Recent price action in USD/JPY raises the risk for a larger correction as the advance from earlier this month fails to produce a test of the December-high (113.75), and the U.S. president’s criticism surrounding the Federal Reserve’s policy may continue to dampen the appeal of the greenback as it undermines the central bank’s ability to independently carry out its dual mandate to foster full-employment and price stability.
With that said, fresh data prints coming out of the U.S. may keep the Federal Open Market Committee (FOMC) on course to further normalize monetary policy as updates to the Gross Domestic Product (GDP) report are anticipated to show the economy expanding 4.2% in the second quarter versus the 2.0% rate of growth for first three-months of 2018. Signs of a more robust economy may spark a bullish reaction in the greenback as it encourages the FOMC to deliver four rate-hikes in 2018, but a marked slowdown in the core Personal Consumption Expenditure, the Fed’s preferred gauge for inflation, may generate a mixed reaction as it curbs bets for an extended Fed hiking-cycle.
Keep in mind, the broader outlook for USD/JPY remains constructive for now as both price and the Relative Strength Index (RSI) preserve the bullish formations from earlier this year, but the reaction to the slew of tweets from President Trump raises the risk for a larger pullback as the exchange rate initiates a fresh series of lower highs & lows, while the momentum indicator finally falls back from overbought territory and approaches trendline support.
USD/JPY Daily Chart
USD/JPY falls back towards the former-resistance zone around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) after failing to test the December-high (113.75), and a break/close below the state region may open up the downside targets if price and the RSI snap the upward trends from earlier this year. A break of trendline support may spur a move back towards the July-low (110.28) as it highlight a bearish signal, with the next downside region of interest coming in around 109.40 (50% retracement) to 110.00 (78.6% expansion).
For more in-depth analysis, check out the Q3 Forecast for Japanese Yen
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--- Written by David Song, Currency Analyst
Follow me on Twitter at @DavidJSong.