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Bearish USD/JPY Behavior Takes Shape Ahead of U.S. GDP, FOMC Meeting

Bearish USD/JPY Behavior Takes Shape Ahead of U.S. GDP, FOMC Meeting

2018-07-25 20:00:00
David Song, Strategist
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Japanese Yen Talking Points

USD/JPY remains under pressure as U.S. President Donald Trump tweets that ‘tariffs are the greatest,’ and the exchange rate may exhibit a more bearish behavior ahead of the next Federal Open Market Committee (FOMC) interest rate decision on August 1 as the central bank is widely expected to keep the benchmark interest rate on hold.

Image of daily change for major currencies

Bearish USD/JPY Behavior Takes Shape Ahead of U.S. GDP, FOMC Meeting

Image of daily change for USDJPY

Recent remarks from the U.S. president has swayed the near-term outlook for USD/JPY as the leader warns that a strong dollar is ‘taking away’ the competitive advantage of the U.S. economy,’ and a comments surrounding the conduct of monetary policy may continue to impact the exchange rate as it undermines the independence of the Federal Reserve.

Image of Fed Fund Futures

In response, the FOMC may continue to prepare U.S. households and businesses for higher borrowing-costs as Fed Fund Futures continue to price a greater than 80% probability for a move in September, and fresh data prints coming out of the economy may keep the central bank on course to implement four rate-hikes this year as the 2Q Gross Domestic Product (GDP) report is anticipated to show the growth rate expanding 4.2% per annum, which would mark the highest reading since 2014.

Signs of a more robust economy may encourage Chairman Jerome Powell & Co. to retain a hawkish outlook as the committee largely achieves its dual mandate for full-employment and price stability, and comments pointing to an imminent rate-hike may curb the recent pullback in USD/JPY as the Bank of Japan (BoJ) remains in no rush to abandon its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.

In turn, the FOMC’s may strike a similar tone to the semi-annual Humphrey-Hawkins testimony, but recent price action in USD/JPY warns of a larger pullback ahead of the Fed meeting as the advance from earlier this year unravels, with the Relative Strength Index (RSI) highlighting a similar dynamic.

USD/JPY Daily Chart

Image of USDJPY daily chart
  • There appears to be a shift in USD/JPY behavior as both price and the RSI snap the upward trends from earlier this year, and the exchange rate may exhibit a more bearish behavior over the coming days as it extends the series of lower highs carried over from the previous week.
  • In turn, the outlook for USD/JPY no longer remains constructive, with a close below the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) region raising the risk for a move back towards the monthly-low (110.28) followed by the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion).

For more in-depth analysis, check out the Q3 Forecast for the Japanese Yen

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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