It looks vulnerable amid diverging Fed-BoJ policy expectations

• USD/JPY extends its sharp slide back from a two-week high amid sustained USD selling.
• Bets on an imminent start to the Fed’s rate-cutting cycle continue to weigh heavily on the money.
• Geopolitical risks and the Soviet BoJ underpin the safe JPY, contributing to the steep decline.

The USD/JPY pair remains under intense selling pressure for the second day in a row on Monday and is falling to a near two-week low around the 145.25 region heading into the European session. The US dollar (USD) sell-off remains firm on growing acceptance that the Federal Reserve (Fed) will soon begin its policy easing cycle amid signs of cooling inflation. In fact, the US Producer Price Index (PPI) and Consumer Price Index (CPI) released last week indicated that inflation is on a downward trend, which should keep the Fed on track for a rate cut 25 basis points (bps). September. That, in turn, triggers a further decline in US Treasury yields and drags the USD index (DXY), which tracks the greenback against a basket of currencies to a fresh January low.

Meanwhile, the USD bulls failed to get any significant respite from the upbeat US macro data released in the latter part of the week. The U.S. Census Bureau reported Thursday that retail sales rose 1 percent in July and used car sales rose 0.4 percent, both beating estimates. In addition, initial jobless claims fell to 227,000 in the week ended August 10 from 234,000 previously and pointed to a resilient US labor market. Moreover, the preliminary report from the University of Michigan showed on Friday that the US consumer sentiment index improved for the first time after four months of declines and rose to 67.8 in August. Further details of the report showed that expectations for headline inflation over the next year and five years remained steady at 2.9% and 3% respectively.

This, however, does nothing to lend any support to the Greenback. The Japanese yen (JPY), on the other hand, is attracting some refuge flows amid the risk of further escalation of geopolitical tensions in the Middle East. Market concerns resurfaced after Hamas issued an official statement on Sunday and rejected the terms of a hostage release and ceasefire deal discussed in Doha last week. Apart from this, the Bank of Japan’s (BoJ) calculated expectations, supported by Japan’s upbeat Q2 gross domestic product (GDP), support the JPY. This is further contributing to USD/JPY’s decline from a near two-week high around the 149.40 region reached last Thursday.

Going forward, market focus now turns to the release of Wednesday’s FOMC meeting minutes, which, along with Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium, will be scrutinized for clues on the rate cut path. This, in turn, will influence USD demand. Apart from that, investors this week will be closely watching BoJ Governor Kazuo Ueda’s appearance in parliament on Friday, where he is expected to discuss the decision to raise interest rates last month. This should provide a significant boost to the USD/JPY pair. However, the fundamental context suggests that the path of least resistance for spot prices remains to the downside.

Technical perspectives

From a technical perspective, an intraday dip below the 200-hour simple moving average (SMA) and the 38.2% Fibonacci retracement level from the recent recovery from the YTD low could be seen as a new trigger for traders of bear. That being said, the oversold Relative Strength Index (RSI) on the 1-hour chart is helping the USD/JPY to recover about 50 pips from the daily low. However, any further recovery beyond the 146.00 mark is more likely to face stiff resistance and remain capped near the 146.50 area (38.2% Fibo. level). The latter should act as a pivot point for intraday traders which, if compensated, could lift spot prices beyond the 147.00 threshold towards testing the 200-hour SMA, currently pegged near the 147 region, 30. It is followed by the 23.6% Fibo. level, around the 147.60-147.65 zone, above which the bulls could aim to recover the round figure of 148.00.

On the other hand, the daily swing low around the 145.25 region now seems to protect the immediate decline ahead of the psychological 145.00 mark. Some further selling should pave the way for a decline to the 61.8% Fibo. level, around the 144.65 area. USD/JPY could eventually drop to the 144.00 level before extending the downward trajectory to the next relevant support near the 143.60 area en route to the 143.00 round figure.

USD/JPY Hourly Chart