Looks vulnerable amid BoJ-Fed policy divergence, focus on US CPI

• USD/JPY falls to new YTD low in reaction to dovish remarks from BoJ’s Junko Nagakawa.
• A softer risk tone continues to benefit the JPY and contribute to the slide against a weaker USD.
• Bears are becoming cautious and are now eagerly awaiting the US CPI report before placing new bets.

USD/JPY is lower for a second day in a row – marking the sixth day of a negative move in the past seven – and is weakening below the 141.00 level for the first time since December 2023. Japanese yen (JPY) gains strongly positive traction after Bank of Japan (BoJ) board member Junko Nagakawa indicated the central bank will raise interest rates further if the economic outlook aligns with forecasts. This adds to BoJ Governor Kazuo Ueda’s dovish outlook and reaffirms bets that the Japanese central bank will raise borrowing costs again in 2024.

This marks a large divergence from market expectations that the Federal Reserve (Fed) will begin its policy easing cycle in September and is causing JPY carry trades to unwind. In fact, the CME FedWatch tool indicates that markets have fully priced in a move to cut the Fed rate by 25 basis points at the next policy meeting on September 17-18 and the possibility of a 50 basis point cut is about 30%. This triggers a modest pullback in the US dollar (USD) from the vicinity of the monthly peak and is proving to be another contributing factor to the tone offered around the USD/JPY pair.

Meanwhile, investor jitters ahead of crucial US consumer inflation numbers are weighing on global risk sentiment and benefiting the JPY’s relatively safe status. This, along with some technical selling below the 142.00 level, is compounding the bearish pressure surrounding the USD/JPY pair. Traders, however, are becoming cautious and prefer to wait for the release of the key US Consumer Price Index (CPI) report before positioning for any further downside moves. Any further signs of cooling inflation would increase market bets for aggressive policy easing by the Fed and hurt money.

Conversely, the reaction to a stronger CPI print is more likely to be limited amid favorable Fed expectations, suggesting that the path of least resistance for the greenback and USD/JPY remains to the downside. Therefore, any significant attempt at a recovery could still be seen as a selling opportunity and risk fizzling out rather quickly.

Technical perspectives

From a technical perspective, spot prices are managing to bounce back around 70 pips from the 140.70 area, or the lower limit of a downtrend channel. The said support should now act as a key point for short-term traders, which, if decisively broken, should pave the way for the extension of a two-month-old downtrend. The USD/JPY pair could then decline to the December 2023 low around the 140.25 area before finally breaking down to the psychological 140.00 level.

On the other hand, any further recovery is likely to face stiff resistance near the break point of the 142.00 horizontal support. That said, sustained strength beyond could trigger a short-covering rally and lift USD/JPY to the top of the Asian session around the 142.45 region. Momentum could extend further towards retrieving the 143.00 round figure on the way to the weekly top around the 143.70 supply area. Some subsequent buying would suggest that spot prices have formed a near-term low and set the stage for a new appreciation move.

USD/JPY 4 hour chart