USD/JPY Outlook: Will BoJ tweak YCC policy again?

The US/JPY has managed to climb back to the 140.00 handle, recovering nicely from the sub-138.00 levels it reached last week. However, the USD/JPY outlook now hinges on next week’s key central bank decisions from the US Federal Reserve and Bank of Japan. I wouldn’t be surprised if 140.00 now acts as a ceiling and we drift back towards 138.00 again ahead of those meetings.

Dollar rebounds after bruising week

It has been a good day for the dollar so far, rising sharply against the pound and yen, and adding to its recovery against the antipodean currencies. The dollar index was off a 15-month low, in other words, as the stay below 100.00 proved to be short-lived – at least for now. Clearly the dollar was oversold in the short-term outlook, so a bit of position squaring and speculative buying ahead of the FOMC was always likely.

The US dollar recovery comes on the back of a terrible week for the greenback. The narrative that the Federal Reserve is winning the fight against inflation got a boost as both CPI and PPI came in weaker than expected last week, causing the DXY to fall below 100.  

But it has since started to find come love again. On Friday afternoon, we saw the release of the UoM consumer sentiment and inflation expectations indices, which came out higher than expected. The 1-year Inflation Expectations printed 3.4% vs. 3.1% expected, which would suggest inflation could remain sticky, requiring the contractionary monetary policy to be in place longer. And then on Tuesday, the latest retail sales data revealed a mixed picture as the June figures came in weaker, but the data for May got revised higher, suggesting the US consumer remains relative strong. Indeed, retail sales control rose by 0.6% m/m, defying forecasts of a fall of 0.3%.

Today’s housing market data was poor, however. After a big surprise rise in May, US Housing Starts and Building Permits both declined more than expected in June, falling 8.0% and 3.7% m/m, respectively. The USD/JPY drifted a bit lower from its earlier highs, following the latest data.

FOMC and BOJ meetings key for USD/JPY next week

The narrative that the Federal Reserve is winning the fight against inflation got a boost last week as both CPI and PPI came in weaker than expected, causing the Dollar Index to fall below 100. Investors are now betting that next week’s meeting could mark the end of the tightening cycle. But will the Fed indicate otherwise?

Meanwhile, there’s been lots of speculation doing the rounds that the Bank of Japan could adjust its yield curve control policy further at next week’s meeting, 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. In any case, the central bank’s ultra-loose monetary policy will still be with us for a long time.

Therefore, while the short-term USD/JPY outlook is uncertain, the long-term direction is still to the upside as the BoJ will not be in a rush to normalise policy.

USD/JPY outlook: technical analysis

The USD/JPY has managed to clink onto that key support around 138.00, leading to a bounce back to 140.00, which is now being tested as resistance. Previously, this 140.00 level had offer strong support around mid-June, leading to a 500-pip rally that ultimately ended around 145.00 later that month.

Now testing 140.00 from below, there is a risk that we could see fresh weakness come into play here, in light of the dollar’s big sell-off last week, and ahead of those key central bank meetings.

In the short-term, the USD/JPY could be heading back down to 138.00, where we have prior support and resistance converging with the bullish trend line and the 200-day average.

However, if 140.00 gives ways, then I wouldn’t rule out a move towards 142ish. 

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R