USD/JPY Forex Technical Analysis – Weaker as Odds of Fed’s Super-Sized Rate Hike Fade

The Dollar/Yen is edging lower late in the session on Friday as bullish traders took a breather after driving the Forex pair into a 24-year high earlier in the week. Also weighing on the Dollar/Yen were dovish comments from two of the Federal Reserve’s most hawkish policymakers, who played down the possibility of a super-sized 100 basis point rate hike at the next policy meeting on July 26-27.

At 17:54 GMT, the USD/JPY is trading 138.520, down 0.441 or -0.32%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) is at $67.57, up $0.19 or +0.28%.

Federal Reserve Governor Christopher Waller and St. Louis Fed President James Bullard remarked on Thursday that they supported a 75 basis point rate hike at the upcoming meeting, instead of the 100 basis points predicted by some of the market participants.

The probability of a 100 basis point rate hike at the July meeting has receded to around 51 percent following the comments, according to CME Group’s FedWatch tool.

However, Fed fund futures now indicate an 81% chance of a 75 basis points increase and a 19% chance of a 100 basis points increase.

Short-Term Outlook

Late in the session on Friday, the USD/JPY is trading inside the previous session’s range. This typically suggests investor indecision, impending volatility or a transition between bullish to bearish.

In this case, it’s probably investor indecision that’s driving the price action. Traders know the fundamentals are overwhelmingly bullish, but they aren’t sure if the Fed is going to raise rates 75 basis points or 100 basis points later in the month.

Trader reaction to 138.336 is likely to determine the direction of the USD/JPY into the close on Friday.

Bullish Scenario

A sustained move over 138.336 will indicate the presence of buyers. If this creates enough upside momentum then look for a retest of this week’s high at 139.389.

Bearish Scenario

A sustained move under 138.336 will signal the presence of sellers. If this generates enough downside momentum then we could see a late session drive into a minor pivot at 137.070.