USD/JPY Forecast: Surges on Risk Aversion, Central Bank Concerns

Highlights

• USD/JPY hits multi-month high on risk aversion and central bank concerns.
• Japan’s manufacturing activity contracts, service sector growth slows.
• Fed maintains rates but signals pause with potential rate increases.

Overview

The USD/JPY surged to a multi-month high as risk aversion drove investors towards the dollar amid concerns over central banks’ hawkish stance on monetary tightening. The dollar stood near a seven-month high against the yen at 143.452. Meanwhile the Bank of Japan’s dovish policy contrasted with its peers. However, economic indicators showed Japan’s manufacturing activity contracting in June, and service sector growth slowing for the first time in seven months, despite core consumer prices remaining above the BOJ’s 2% target for the 14th consecutive month.

Traders Monitoring Intervention Comments

Tokyo’s FX traders monitored official comments as the yen weakened, approaching levels where government intervention occurred last year. The currency traded past 143 per dollar, falling almost 1% in the previous session. The growing divergence between Japan’s monetary policy and its counterparts continued to weigh on the yen. The strong rally is also prompting expectations of a verbal intervention from Japanese authorities.

Market Eyes Potential Rate Hike

Federal Reserve Chair Jerome Powell emphasized a careful pace for interest rate increases to combat inflation, with markets pricing in a 74% chance of a 25 bps rate hike at the next policy meeting. Additionally, investors assessed higher-than-expected weekly jobless claims data, while Powell’s comments aligned with the central bank’s guidance of further rate hikes. The Fed maintained interest rates but projected two 25 basis point increases this year, marking a pause in their previous rate hiking campaign.

Supported by Risk Aversion, Central Bank Hawkishness

In summary, the USD/JPY reached a multi-month high due to risk aversion and concerns over global central banks’ hawkish monetary tightening. Japan’s contrasting policy stance, declining manufacturing activity, and slowing service sector growth put pressure on the yen. Meanwhile, Powell’s cautious approach to interest rate hikes and the expectation of further increases influenced market sentiment.

Technical Analysis

Market analysis for USD/JPY reveals a bullish tone. The price remains above both the 200-4H moving average of 139.029 and the 50-4H moving average of 141.280. The current 4-hour price of 143.058 shows a slight decline from the previous close of 143.084, indicating a relatively stable relationship. The overbought reading of the 14-4H RSI at 72.46 suggests the potential for a corrective phase or consolidation.

The main support area is identified between 138.783 and 138.441, while the minor support area is between 141.934 and 141.574. Overall, the market sentiment for USD/JPY is bullish, although caution is advised due to the overbought RSI reading.