USD/JPY Nearly Posts Biggest Weekly Gain in 17 Years

The Japanese Yen spiked lower against several major currencies on July 11, setting a bearish tone for the week. When all was said and done, the USD/UPY finished the week at 104.808, up 4.256 or +4.23%, while the EUR/JPY closed the week at 115.65, up 4.544 or +4.09%.

The catalysts behind the rally by the U.S. Dollar against the Yen were hopes of more monetary stimulus in Japan and strong jobs data from the U.S.

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The U.S. non-farm payrolls report released the previous Friday on July 8 brought great comfort for bullish U.S. Dollar traders, and for that matter, all financial markets. The report showed the U.S. jobs market added 287,000 jobs in June, beating expectations. The unemployment rate read 4.9 percent, also better than forecast.

Due to the strength of the U.S. labor report, investors raised the chances of at least one rate hike by the Fed in 2016. This news made the U.S. Dollar a more attractive investment to foreign investors.

Also pressuring the Yen was the news that Japan’s ruling coalition won a landslide victory in upper house elections. This just about assured that Prime Minister Shinzo Abe will be able to push through further monetary easing measures. Most traders expect a stimulus package of at least 10 trillion yen ($97.9 billion).

Although the USD/JPY closed higher for the week, it formed a potentially bearish chart pattern on Friday. Early in the session, the Dollar/Yen rallied to a three-week high and was set for its biggest weekly gain against the Japanese currency in 17 years after strong U.S. and Chinese economic data weakened demand for the Yen as a safe haven currency.

However, the Yen rallied late Friday as investors jumped into the Yen for protection after a group within Turkey’s military attempted to overthrow the government.

The British Pound trended higher most of the week on short-covering as investors who had shorted the market after the U.K.’s decision to leave the European Union decided to take profits. The buying was strong enough to drive the Sterling to its highest level since June 30. Despite a sell-off on Friday, fueled by the news out of Turkey, the GBP/USD still managed to close at 1.3179, up 0.0229 or +1.77%.

Early in the week, the British Pound got a boost when one political hurdle created by Brexit was overcome. This was the appointment of a new prime minister, Theresa May, on July 13.

On Thursday, July 14, the Bank of England surprised investors by passing on an interest rate cut, despite prior guidance from Governor Mark Carney that policy easing could be forthcoming. A survey taken ahead of the Monetary Policy Committee’s meeting showed that at least 60% of economists were looking for at least a 25 basis point interest rate reduction.

The MPC voted by a majority of eight-to-one to hold the rate at 0.5 percent and unanimously to make no further additions to its £375 billion ($501.2 billion) quantitative-easing program. This would’ve been the first change to the key rate since 2009.

Traders were surprised by the BoE news because two weeks ago, Carney publicly said “some monetary policy easing would likely be required over the summer,” shortly after the Brexit referendum. However, comments in the minutes strongly hinted of an easing next month.

“In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the committee expect monetary policy to be loosened in August,” the minutes said.