- Markets are pricing in seven 25 basis point rate cuts from the Fed by June 2025
- That has dragged US shorter-date yields lower, along with USD/JPY
- Unless we see a hard US economic landing, that may make meaningful USD/JPY downside difficult
- 146 has brought out the dip buyers recently, including on Monday
Overview
Fed rate cut pricing appears rich relative to recent US data flow. And USD/JPY remains beholden to moves in short-dated US interest rates. So, unless we see a hard economic landing, downside for US yields, and USD/JPY, may be limited in the near-term. It’s going against the grain a little but buying USD/JPY dips is favoured.
USD/JPY in familiar territory
The daily USD/JPY chart tells the story; 146.00 has been an important pivot level going back nearly a year, acting as both support and resistance over that period. There have been lots of bearish probes, but the only ones that have stuck have been where there’s been a sudden rush to pile on US rate cut bets. And even then, they didn’t last long.
Late 2023 when the Fed pivoted towards signaling cuts was the first episode, the second earlier this month when a soft US nonfarm payrolls report for July sparked a sudden acceleration in carry trade unwinds involving the Japanese yen.
Fed rate cut pricing bordering on hard landing territory
With US Fed funds futures favouring seven cuts by June next year, I wonder how much further markets can add to dovish bets if we don’t see a hard economic landing? With a correlation of 0.95 with rate-sensitive US two-year bond yields over the past month, unless we see traders add to rate cut bets from already boated levels, the risk of meaningful downside in USD/JPY looks limited.
And then there’s the price action we’ve seen recently.
Dips buyers below 146
As was the case in December 2023, 146.00 is proving influential. You can see there have been numerous dips towards the level over the past fortnight since the initial panic, but only two attempts have been successful in breaking below the level. And when they did, the move was reversed quickly, including on Monday this week.
Buyers are lurking below. Unless we see another big increase in dovish Fed rate cut bets, which Jerome Powell is unlikely to promote when he speaks at Jackson Hole, why not join them in looking for USD/JPY upside?
USD/JPY trade idea
Buying below 146.00 with a stop underneath Monday’s low is one potential setup, allowing traders to establish longs looking for a retest of 148.80 or former uptrend support which is currently located just above 149.00.
-- Written by David Scutt
Follow David on Twitter @scutty
