HomeNewsUSD/JPY Analysis: More Yen Strength Ahead?
USD/JPY Analysis: More Yen Strength Ahead?

USD/JPY Analysis: More Yen Strength Ahead?

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A weaker US Dollar helped the USD/JPY finish July with its weakest 4-week performance since the depths of the covid crash.

The Japanese Yen had a storming July, gaining almost 2% vs the US Dollar, its best month in over two and fourth best since 2016.

The sell-off in USD/JPY is a mix of US Dollar weakness and the unwinding of bearish Yen trades. Traders have flocked to the US Dollar in recent months as the FOMC is seen as being ahead of the curve in fighting inflation. This year, the fed has raised rates at the fastest rate since the early 1990’s. Last week the central bank enacted its second consecutive 75 basis-point hike, bringing the benchmark overnight borrowing rate range to 2.25%-2.5%.

Whilst the fed has acted decisively to bring inflation down to its 2% target, the Bank of Japan (BOJ) has adopted a different approach. Despite signs that consumer prices are picking-up, Japanese interest rates remain close-to-zero. Subsequently, capital has flown west to take advantage of the widening carry trade.

However, a softer tone from Fed Chair Powell’s at last week’s post-FOMC press conference sparked US dollar selling.

Speaking to reporters, Powell said, “As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,”.

As a result, the beaten-down Japanese Yen is in the midst of an impressive reversal. At the time of writing, the USD/JPY is down over 5% in the last two weeks. Furthermore, the technical outlook suggests the Yen may have more room to run.

Dollar to Yen Outlook

The daily chart shows USD/JPY has fallen out of its long-term uptrend. Furthermore, the pair is extending further below the 50-Day Moving Average (green line).

Due to the technical breakdown, we should expect to see bearish Yen positions unwound over the coming days. In this event, the USD/JPY may target the 100-DMA just above the psychological 130.00 support level.

That being said, the outlook remains bearish unless the pair reclaims the rising trend line. For that reason, a daily close above 136.00 suggests the bulls are back in control.

USD/JPY Price Chart

Elliot Laybourne
Elliott is a former investment banker with a 20 year career in the city of London. During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making. During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others. Today, he splits his time between Thailand and Dubai, from where he provides trading consultancy and business development services for family office and brokerage clientele.