I indicated in the recent technical analysis that the stability of the USD/JPY currency pair for several trading sessions in a narrow environment may herald the start of a strong move that reflects the arrival of technical indicators toward overbought levels. During today’s trading, the USD/JPY currency pair retreated towards the level The support is at 143.60, after strong recent gains. The resistance level is 145.06, its highest in eight months.
The US dollar traded lower against most of the other major currencies in the middle of this week's trading, only gaining momentum against the euro and the Swiss franc. With US markets closed for Independence Day on Tuesday and therefore no economic data on the agenda, traders may have held their short positions after a disappointing ISM Manufacturing PMI for June.
However, this drop was not reflected in Treasury yields nor in market expectations about the Fed's future course of action. Investors still expect a slight rate increase of just over 30 basis points and a series of rate cuts through 2024. With that in mind, traders may pay extra attention to any incoming information that can help them better assess where interest rates are headed. The next bit of this information could be the June FOMC decision minutes.
The minutes of the meeting, which was announced yesterday, indicated that there is a division among US central bank officials in the course of raising interest rates, but in the end, the bank will raise interest rates more times until the record US inflation is contained. However, with officials' opinions already reflected in the points chart and Fed Chairman Jerome Powell speaking several times since then, the minutes are unlikely to produce any surprises and they did.
In general, investors may prefer to wait for ADP and ISM Non-Manufacturing PMI readings, ahead of Friday's US Non-Farm Payrolls numbers. After larger-than-expected declines in both price and sub-employment of the ISM Manufacturing PMI, investors may be looking for confirmation of whether price pressures will continue to ease at a rapid pace and whether the labor market is indeed declining.
If the upcoming economic data is indeed indicative, then traders could trim some basis points to the expected hikes, and possibly increase their cut bets for next year, which could hurt the US dollar.
The yen was also among the gainers against the US dollar, perhaps as some traders shorted long USD/JPY positions near the psychological 145.00 area amid fears of possible Japanese intervention. And just yesterday, Japan's chief financial diplomat, Masato Kanda, said they are in close contact with US Treasury Secretary Janet Yellen and other outside officials "almost every day," which adds more credibility to traders' concerns and thus could lead to further liquidation or hedging. Short yen deals.
However, since the Japanese authorities said they are watching the pace of the JPY's decline, not the level, a cautious and slow break of 145.00 in USD/JPY may not sound alarm bells just yet. Finance Minister Suzuki emphasized that Japan and the US are in close communication, but he avoided comments he used just before last year's intervention, such as "deep concern about the weakness of the yen." Thus, even if USD/JPY breaks above the 145.00 level, as long as the pace of decline is slow, an intervention loop may be temporarily avoided.
USD/JPY Technical Outlook
Even with today's bearish move in the performance of the USD/JPY currency pair, and according to the performance on the daily chart, the general trend of the currency pair is still bullish. The move is very natural with its recent strong gains, which moved the technical indicators toward strong overbought levels.
The currency pair may remain moving in narrow ranges until the reaction to the results of the important US economic data today and tomorrow, which will have a strong and direct reaction on the future of raising US interest rates. A first break of the trend will not occur without the currency pair moving toward the support levels at 142.20 and 141.00, respectively.
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