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Japanese Yen Talking Points

USD/JPY dips to a fresh monthly-low (110.11) as the latest adjustment in U.S. trade policy fuels the risk for a global trade war, and recent price action keeps the near-term outlook tilted to the downside as the exchange rate continues to carve a series of lower highs & lows.

Image of daily change for major currencies

Bearish USD/JPY Sequence Keeps Downside Targets on Radar

Image of daily change for usdjpy

The Japanese Yen appears to be benefitting from the risk adverse environment as growing tensions between the United States and Turkey dampen the outlook for global growth, and the threat for contagion may keep USD/JPY under pressure as it undermines the Fed’s scope to implement higher borrowing-costs over the coming months.

Image of fed fund futures

Even though the Federal Open Market Committee (FOMC) appears to be on track to deliver four rate-hikes in 2018, the uncertainty surrounding U.S. trade policy seems to be rattling market expectations as Fed Fund Futures now reflect easing bets for a 25bp rate-hike in December.

As a result, USD/JPY stands at risk of exhibiting a more bearish behavior ahead of the next FOMC meeting on September 26, and lackluster data prints coming out of the U.S. economy is likely to keep dollar-yen under pressure as updates to the Retail Sales report is anticipated to show household spending increasing 0.1% in July versus the 0.5% expansion the month prior.

Keep in mind, there appears to be a broader shift in USD/JPY behavior as both price and the Relative Strength Index (RSI) snap the upward trends from earlier this year, with the dollar-yen exchange rate at risk for a larger correction as it appears to be coming off of channel resistance.

USD/JPY Daily Chart

Image of usdjpy daily chart
  • Recent series of lower highs & lows keeps the downside targets on the radar for USD/JPY, with a break/close below the 109.40 (50% retracement) to 110.00 (78.6% expansion) region raising the risk for a move back towards 108.30 (61.8% retracement) to 108.40 (100% expansion), which sits just above the May-low (108.11).
  • Keeping close eye on the Relative Strength Index (RSI) as it also exhibits a bearish dynamic, but a break of trendline resistance may warn of range-bound conditions for USD/JPY as the downward momentum abates.

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

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.