As the 2024 high gives way, USD/JPY extends into the highest levels since 1986. What next?

FUNDAMENTAL OVERVIEW

USD:

The US dollar has been supported since the last FOMC decision as the more hawkish than expected dot plot led to a quick repricing in interest rate expectations with traders increasing rate hike probabilities.

We saw some minor hawkish repricing yesterday as the total tightening expected by year-end rose to 37 bps vs 32 bps seen on Monday. We haven’t got any meaningful catalyst though, so that might have been just daily noise.

The focus is now on the US NFP and CPI reports ahead of the July FOMC meeting. The market is pricing in a 36% probability of a rate hike in July. Data in line or lower than forecasts should lead to some dovish repricing and weigh on the greenback in the short-term. Conversely, stronger than expected figures will likely boost the US dollar further.

JPY:

On the JPY side, nothing has changed fundamentally but the break above the 2024 high on USD/JPY increased the bearish momentum. There’s been some verbal intervention but nothing really strong yet.

On the monetary policy front, the BoJ hiked the policy rate to 1.00% as widely expected at the last meeting and announced the pause to the bond tapering programme from next fiscal year.

The forward guidance remained the same with the BoJ looking to continue the normalisation process, raising the policy interest rate and adjust the degree of monetary accommodation “in response to developments in economic activity and prices as well as financial conditions”.

The divergence with the Fed will continue to keep the USD/JPY pair skewed to the upside until the US data starts to point in the other direction.

USDJPY TECHNICAL ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can see that USDJPY has finally broke out of the recent consolidation and reached the highest levels since 1986. The breakout acted as a catalyst and more buyers started to pile in to extend the rally into new highs. The old resistance around the 161.95 level will now likely act as support.

If we do get a pullback, we can expect the buyers to step in around the support with a defined risk below it to keep pushing into new highs. The sellers, on the other hand, will want to see the price breaking lower to pile in for a drop into the major upward trendline around the 158.00 handle.

USDJPY TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we have a minor upward trendline defining the bullish momentum. The buyers will likely continue to lean on the trendline with a defined risk below it to keep pushing into new highs. The sellers, on the other hand, will look for a break to extend the pullback into the support.

USDJPY TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, there’s not much we can add here although from a risk management perspective, the buyers will have a better risk to reward setup around the trendline and the support. The sellers, on the other hand, should wait for the price to fall back below the 161.95 level to start positioning into new lows. The red lines define the average daily range for today.

UPCOMING CATALYSTS

Today, we have the US ADP report, the US ISM Manufacturing PMI and Fed Chair Warsh speaking at the ECB Forum in Sintra. Tomorrow, we conclude with the US NFP report, and the US Jobless Claims figures.