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Japanese Yen Talking Points

USD/JPY appears to be on track to test the July-high (113.18) as the Bank of Japan (BoJ) remains in no rush to conclude its easing-cycle, and dollar-yen may stage a larger advance going into the Federal Reserve interest rate decision as the exchange rate breaks out a narrow range.

Image of daily change for major currencies

USD/JPY Rate Eyes July-High as BoJ Ramps Up Dovish Forward-Guidance

Image of daily change for USDJPY

Recent comments from the BoJ suggest the central bank will continue to carry out its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control as Governor Haruhiko Kuroda & Co. lower the inflation forecast, with USD/JPY at risk of exhibiting a more bullish behavior amid the diverging paths for monetary policy.

Image of Fed Fund Futures

Even though the Federal Open Market Committee (FOMC) is widely expected to keep the benchmark interest rate on hold in August, Chairman Jerome Powell & Co. may utilize the meeting to prepare U.S. households and businesses for higher borrowing-costs as ‘participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020.

As a result, a batch of hawkish Fed rhetoric may fuel the recent advance in USD/JPY as the central bank alters the forward-guidance for monetary policy, but more of the same from Chairman Powell & Co. may rattle the recent strength in the exchange rate as curbs bets for four Fed rate-hikes in 2018.

Keep in mind, recent price action foster a more constructive outlook for USD/JPY as it breaks out of a narrow range, but the broader outlook remains clouded with mixed signals as both price and the Relative Strength Index (RSI) fail to retain the upward trends from earlier this year.

USD/JPY Daily Chart

Image of USDJPY daily chart
  • There appears to be a shift in USD/JPY behavior as the upward trend unravels, but recent price action raises the risk for a run at the July-high (113.18) as it breaks out of the previous week’s range.
  • Close above the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) region brings the 112.40 (61.8% retracement) to 112.80 (38.2% expansion) area back on the radar, with the next region of interest coming in around 113.80 (23.6% expansion) to 114.30 (23.6% retracement) on the radar, which sits just above the December-high (113.75).

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.