- USD/JPY attracts heavy selling for the third straight day and touches a multi-week low.
- The divergent BoJ-Fed policy expectations turn out to be a key factor weighing on the pair.
- A positive risk tone and a modest USD bounce lend support ahead of the US PPI report.
The USD/JPY pair prolongs its downtrend for the third straight day and drops to over a three-week low on Thursday. However, a modest US Dollar (USD) bounce assists spot prices to find some near the 146.20 area during the early part of the European session. However, the fundamental backdrop seems tilted in favor of bearish traders and warrants caution before positioning for any meaningful recovery.
Traders are overwhelmingly betting that the US Federal Reserve (Fed) will lower borrowing costs by 25 basis points (bps) at the next policy meeting in September and deliver at least two interest rate cuts by the end of this year. The expectations were lifted by a series of disappointing US economic data released recently, including the closely-watched Nonfarm Payrolls (NPF) report, which pointed to deteriorating labor market conditions. Furthermore, the mostly in-line US inflation figures released op Tuesday eased fears that trade-related costs may feed into broader price pressures and reinforces the narrative for further policy easing by the Fed.
Meanwhile, US President Donald Trump escalated his pressure on Fed Chair Jerome Powell to cut interest rates. Furthermore, US Treasury Secretary Scott Bessent said that the Fed should think about a 50 bps rate cut next month. Chicago Fed President Austan Goolsbee said that he’s more concerned about last month’s rise in the underlying inflation than an unusually weak jobs report and that he may not be inclined to support a rate cut in September. Separately, Atlanta Fed President Raphael Bostic acknowledged a general weakening in the labor data and noted that tariffs may cause structural changes, though he refrained from commenting on rate cuts.
This marks a significant divergence in comparison to the Bank of Japan (BoJ) hawkish outlook. In fact, the BoJ revised its inflation forecast at the end of the July meeting last week, and reiterated that it will raise interest rates further if growth and inflation continue to advance in line with its estimates. This keeps the door open for an imminent BoJ rate hike move by the end of this year and should continue to underpin the Japanese Yen (JPY), which seems unaffected by the risk-on environment. An extension of the US-China trade truce and the US-Russia summit aimed at ending the war in Ukraine remains supportive of the upbeat market mood.
Traders now look forward to the release of the US Producer Price Index (PPI), which, along with speeches by influential FOMC members, will drive the USD demand and provide some impetus to the USD/JPY pair. The market focus will then shift to Japan’s Preliminary Q2 GDP print, due during the Asian session, followed by the University of Michigan US Consumer Sentiment Index later on Friday. This might further contribute to producing some meaningful trading opportunities heading into the weekend.
USD/JPY 4-hour chart
Technical Outlook
An intraday breakdown and acceptance below the 200-period Simple Moving Average (SMA) on the 4-hour, around the 147.00 mark, could be seen as a fresh trigger for the USD/JPY bears. However, the Relative Strength Index on the said charts hovers close to oversold territory and makes it prudent to wait for some intraday consolidation or a modest bounce before positioning for deeper losses.
Meanwhile, any meaningful recovery attempt is more likely to attract fresh sellers and remain capped near the 147.00 support-turned-resistance. The latter should now act as a key pivotal point for intraday traders, above which a fresh bout of a short-covering move could lift the USD/JPY pair to the 147.45-147.50 region.
Nevertheless, the USD/JPY pair seems poised to slide towards testing sub-146.00 levels (July 24 low) before extending the fall further to the next relevant support near the 145.40-145.30 region. The downward trajectory could eventually extend towards challenging the 145.00 psychological mark
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