- A combination of factors sparks long-term profit-taking around USD/JPY on Friday.
- Speculation about Japanese intervention boosts the yen and puts pressure on the pair amid a further decline in the dollar.
- The divergence between Fed and Bank of Japan policies should act as a tailwind for the pair and limit deeper losses.
The pair USD/JPY is subject to strong sales on the last day of the week and pulls back further from its highest level since August 1998, around the 145.00 region touched on Wednesday. The pair maintains its selling tone during the European session and currently hovers near the 142.00 level or a minimum of three days.
Speculation that the authorities could intervene soon to stop the free fall of the Japanese yen turn out to be a key factor driving an aggressive withdrawal of funds around the USD/JPY pair. This, along with current dollar profit-taking from two-decade highs, further contributing to the sharp intraday drop. The dollar’s decline, however, appears muted amid firming expectations that the Fed will continue to tighten monetary policy at a faster pace to control inflation.
In fact, the implied odds of a 75 basis point Fed rate hike in September now stand at 85%. Bets were bolstered by hawkish comments from the Fed chair, Jerome Powell, who reiterated the central bank’s firm commitment to reduce inflation. This remains supportive of elevated US Treasury yields. The widening resulting from the rate differential between the United States and Japancoupled with a positive risk tone, could weigh on the safe-haven yen and support the USD/JPY pair.
Also, the Bank of Japan has lagged behind other major central banks in the process of normalizing its monetary policies and continues determined to continue with its flexibility. This, in turn, suggests that the worst is not yet over for the Japanese yen and the path of least resistance for USD/JPY is to the upside. Therefore, any subsequent corrective decline could still be seen as a buying opportunity and is more likely to remain limited, at least for now.
In the United States there will be no major economic releases, so the dollar will be at the mercy of the speeches of the Fed officials. Apart from this, the performance of US bonds could influence the price dynamics of the dollar and provide some momentum to the USD/JPY pair. Traders will follow signals from the broader risk sentiment to take advantage of some short-term opportunities around the pair.
USD/JPY technical levels
Source: Fx Street
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