Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there. In this week’s report, it is all about Japanese yen analysis and next week’s big central bank meetings.
- BOJ to leave policy unchanged: Reuters
- Japanese yen technical analysis: USDJPY and EUR/JPY
- Looking ahead: FOMC, ECB and BOJ rate decisions
The Japanese yen’s rally last week seems like a distant memory now. The USD/JPY, EUR/JPY and other JPY crosses all rallied sharpy this morning, adding to their gains from earlier in the week, as investors priced out the potential for a policy change from the Bank of Japan following a Reuters report. The USD/JPY, already managing to climb to the 140.00 handle and recovering nicely from the sub-138.00 levels it had hit last week, added another 195 pips to reach just shy of 142.00 on Friday morning. The USD/JPY outlook now hinges more on the decision from the Fed than the BoJ. Meanwhile, the EUR/JPY hit a new high for the year above 158.00, before pulling back a touch. The ECB’s decision will be watched closely next week as it has the potential to move the euro crosses sharply, including the EUR/JPY.
BOJ to leave policy unchanged: Reuters
The latest yen sell-off comes after Reuters reported that the BOJ is not likely to introduce any changes to its yield curve control settings next week, citing 5 sources familiar with the central bank’s thinking. What’s more, Reuters reports that many BoJ policymakers see no imminent need to phase out the bank’s stimulus measures.
As the yen sold off, the USD/JPY rallied and this helped to lift the Dollar Index above 101.00, which thus made the greenback stronger against other currencies as well. But the yen soon started to find some mild support on fears the Japanese government could intervene after the nation’s top currency diplomat Kanda said excessive FX moves are undesirable and that they are watching FX markets with a sense of urgency.
Before discussing next week’s major central bank meetings, let’s have a quick look at the USD/JPY and EUR/JPY charts.
Japanese yen technical analysis: USDJPY and EUR/JPY
The USD/JPY has reclaimed the 140.00 psychological level decisively after holding that long-term support zone around 138.00 where prior resistance and the 200-day average proved too strong a region for the bears to attack last week. The USD/JPY is now back near 141.80 to 142.00 resistance area, which was being tested at the time of writing. Unless the Fed unexpectedly turns out to be rather dovish or the BoJ changes its YCC settings unexpectedly next week, and barring any surprise intervention from the Japanese government, a move towards 145.00 looks likely now.
The EUR/JPY meanwhile, is continuing to look rather strong and given the potential for the ECB to hike rates potentially twice more this year, this should keep this pair supported on the dips. Support comes around 156.60ish to 157.00ish now. The 21-day exponential average has been reclaimed and it is essential that the bulls hang on to it now. For as long as today’s low at 155.59 holds in the next few sessions, the path of least resistance would be to the upside.
Looking ahead: FOMC, ECB and BOJ policy decisions
There’s not a lot on the economic calendar today for US investors, which means volatility could be light ahead of next week’s major central bank decisions.
As my colleague Matt Simpson reported in his week ahead article, “Wednesday’s FOMC decision sits at the top of the pile, and if the Fed’s message is not clear enough we have a GDP and PCE inflation report to drive expectations for their August meeting. The ECB and BOJ also hold their monetary policy decisions, and Australia’s quarterly inflation report could become a proxy RBA hike if it remains ‘too high’ for the RBA’s liking.”
FOMC monetary policy
Wednesday, July 26
The USD/JPY is going to move sharply on the back of the Fed’s rate decision, along with other dollar pairs on Wednesday. After 10 interest rate hikes the Fed kept policy unchanged at 5-5.25% in June in a unanimous decision. However, the Fed made it clear that in the policy statement, press conference and dot plots that two more rate increases was pencilled in for the remainder of the year. Since that policy meeting, the Fed official have largely remained consistent with this messaging. It looks like there is strong support among the FOMC for a 25-bps hike at this meeting, which is what everyone now also expects.
The dollar has made a comeback after being hit last week on the back of weaker inflation readings. Investors are now wondering whether this meeting could mark the end of the tightening cycle.
So, a rate increase is a forgone conclusion. The Fed must decide whether to signal the likely need for one or more rate increase or whether to move to a more data-dependant mode. If it is the latter, then the market will see it as a clear signal of a pivot, which should hurt the dollar and undermine the USD/JPY – at least until Friday’s BoJ meeting anyway.
It is also worth noting that until the Fed’s September 20 meeting, there will be two further jobs reports and a couple of inflation reports that could significantly impact the Fed’s decision. So, even if the Fed re-iterates the need to hike more, whether the market will believe them is not a given.
ECB monetary policy
Thursday, July 27
Up until last week, investors were confident that there will be at least two more rate increases to come from the ECB this year. However, some dovish comments from ECB officials, including Klaas Knot, who said that monetary tightening beyond Thursday’s meeting is not guaranteed, saw investors reduce bets for a September rate increase. Will ECB President Lagarde remain hawkish, like last time? If so, this could help the EUR/JPY extend its rally towards 160.00.
Bank of Japan monetary policy
Friday, July 28
Until today’s report from Reuters, there had been lots of speculation doing the rounds that the Bank of Japan could adjust its yield curve control policy further at its next meeting on July 28, after some comments from BoJ Deputy Governor Shinichi Uchida. However, the BoJ Governor Kazuo Ueda indicated otherwise, suggesting there might not be a change in YCC after all. It looks like this is now the base case: inaction, as per Reuter’s report (see above). In any case, the central bank’s ultra-loose monetary policy will still be with us for a long time, whether it changes YCC or doesn’t. This should keep the long-term EUR/JPY and USD/JPY forecast bullish.
HERE is our full week ahead preview, by my colleague Matt Simpson.
-- Written by Fawad Razaqzada, Market Analyst