USD/JPY Trend Review: Latest Movements and Market Outlook
USD/JPY has trended down in the past month amid several economic and policy changes in the US and Japan. However, within this downtrend, there were moments when the pair pulled back, rising before continuing its collapse. Below is a more comprehensive look at the moves from last month.
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A Recap of Recent Trends
In the first part of the month, USD/JPY fell to new lows. However, after August 5th, the pair rose before returning to its previous downtrend.
Drivers of the USD/JPY Downtrend
The recent drop in the USD/JPY pair came as the dollar weakened and the yen strengthened. The first catalyst for the pair came when the Bank of Japan surprised with a rate hike at the end of July. Although there was a chance for such a move, most market participants expected no change at the meeting.
As a result, when Japan’s central bank hiked interest rates by 25 bps, the yen soared against the US dollar. At the same time, the central bank released a plan to reduce its bond purchasing. The cumulative effect was a rally in the yen.
Furthermore, as the Bank of Japan tightened its policy, the Fed prepared to start lowering borrowing costs. This divergence in policies also boosted the yen.
Another reason for the drop in USD/JPY was recession fears that jumped after the August US payrolls report. The US unemployment rate jumped, raising concerns of a faster-than-expected slowdown in the US economy. As a result, investors scrambled for safety in the yen, pushing USD/JPY lower.
Key Drivers of the USD/JPY Rebound
On the other hand, the recent rise in the USD/JPY pair came as the dollar recovered and the yen faltered. The dollar recovered as data eased fears of a recession. Business activity, jobless claims, and retail sales data showed a resilient economy. As a result, the dollar rallied, and the yen lost safe-haven inflows.
At the same time, USD/JPY rose as investors reacted to slightly dovish comments from the BoJ Deputy Governor. Shinichi Uchida was concerned about the increased market volatility after the US jobs report. As a result, he said the BoJ should not consider a near-term rate hike. These comments briefly hurt the yen.
Policy and Economic Updates in the US and Japan
The US and Japan have released several economic reports that have shaped the USD/JPY’s trend in the past month. At the same time, policy changes in these two countries have impacted prices.
US Economic and Policy Developments
On the economic front, the US released data showing the economy grew faster than expected. The GDP expanded by 2.8% in the second quarter after a 1.4% expansion. This figure was bigger than the forecast of 2.0% and boosted the US dollar.
The next major economic report was the nonfarm payrolls report. The US economy added a smaller-than-expected 114,000 jobs in July. However, the biggest surprise was the unemployment rate, which jumped from 4.1% to 4.3%. The downbeat figures sunk the US dollar.
After this came the US Consumer Price Index report. Inflation increased moderately by 0.2% in July, as expected. Meanwhile, the annual figure eased to 2.9%, increasing bets for a 25 bps September Fed rate cut. The increase in rate cut expectations weighed on the dollar.
The last major report was on retail sales. Sales unexpectedly rose by 1.0% in July, beating forecasts of a 0.4% increase. This gave the dollar a significant boost as it showed a resilient economy.
On policy, the Fed kept rates unchanged in July but signalled a rate cut in September. Meanwhile, rate cut expectations have gradually risen with incoming data.
Japan’s Economic and Policy Shifts
Meanwhile, the first major report in Japan was that Tokyo’s core CPI rose from 2.1% to 2.2%, as expected. The report had little impact on the yen but was a relief for the Bank of Japan. Higher inflation levels will allow the central bank to continue raising interest rates.
Another significant economic release in Japan was the GDP report. Japan’s economy expanded by 0.8% in the second quarter, beating forecasts for a 0.6% expansion. Moreover, it came after a contraction of 0.6%. The upbeat report boosted the yen, giving the Bank of Japan more room to hike interest rates.
On the policy front, the Bank of Japan unexpectedly hiked interest rates on 31st July. BoJ policymakers voted to increase borrowing costs by 25 bps. The hike boosted the yen as it led to a widespread unwinding of the dollar-yen carry trade. As interest rates in Japan increase, the gap in rates between Japan and the US reduces.
The US released a set of mixed economic reports. However, the main takeaway is that the economy is slowing down. Meanwhile, Japan’s economy is recovering from its fragile state. Therefore, there is more pressure on the Fed to cut rates and the BoJ to hike rates. Consequently, USD/JPY has fallen and could continue this trend.
Upcoming USD/JPY Market Outlook
Investors will focus on US employment and inflation data in the coming month before the Fed policy meeting. Meanwhile, in Japan, economic reports will include inflation and GDP before the Bank of Japan policy meeting. Market expectations show that the Fed will cut interest rates in September. Therefore, there is a high chance policymakers will be dovish, pushing USD/JPY lower. Meanwhile, there is a slight chance the BoJ will hike rates in September. However, even if the central bank keeps rates unchanged, hawkish messaging might boost the yen.
Consequently, the downtrend for USD/JPY might continue.
USD/JPY: A Technical Perspective
On the technical side, USD/JPY is on a downtrend, trading below the 22-SMA, with the RSI below 50 in bearish territory. The trend reversed at 161.70 when bears made an engulfing candle and pushed below the SMA.
The decline paused at the 142.56 level, where the price pulled back to the 0.382 Fib level. Here, bears reemerged and took control. Since the bearish bias is strong, the price might revisit the 142.56 support. Moreover, it might break below this level to make a lower low, continuing the downtrend.
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