(Haresh Menghani – FXStreet)
– USD/JPY staged a solid intraday recovery from a nearly two-month low touched on Monday.
– The widening US-Japan yield differential weighed heavily on the JPY and extended support.
– Hawkish remarks by Fed officials pushed the USD higher and provided an additional boost.
The USD/JPY pair witnessed an aggressive short-covering move from a two-month low touched on Tuesday and rallied nearly 180 pips intraday, snapping a four-day losing streak. The dramatic recovery followed hawkish remarks by Federal Reserve officials, hinting that more interest rates are coming in the near term. In fact, San Francisco Fed President Mary Daly noted that work on inflation is nowhere near almost done and that policymakers are still resolute and completely united on achieving price stability. Separately, Chicago Fed President Charles Evans said that he hopes the US central bank can raise rates by 50 bps in September and continue with 25 bps hikes until the start of the second quarter in 2023.
Later, Loretta Mester, president of the Cleveland Fed, said that several more months of evidence that inflation has peaked will be needed before the central bank ends its rate hike cycle. Adding to this, St. Louis Fed President James Bullard said that the US central bank is committed to the inflation target and that a soft landing is feasible if the regime shift is executed well. This led to an abrupt turnaround in the US Treasury bond yields and widened the US-Japan yield differential, which, in turn, weighed heavily on the Japanese yen. The yield on the benchmark 10-year US government bond reversed an early slide to its lowest level since April and contributed to the US dollar’s solid intraday recovery from a multi-week low.
The combination of supporting factors, to a larger extent, offset a generally weaker risk tone, which did little to benefit the safe-haven JPY or hinder the USD/JPY pair’s overnight move up. The market sentiment remains fragile amid growing worries about a global economic downturn. Adding to this, mounting diplomatic tensions over US House Speaker Nancy Pelosi’s Taiwan visit tempered investors’ appetite for perceived riskier assets. Nevertheless, spot prices settled with strong gains and touched a fresh weekly high during the Asian session on Wednesday. The uptick, however, stalled just ahead of the 134.00 mark amid modest USD weakness, though the downtick was bought into amid signs of stability in the equity markets
Market participants now look forward to the US economic docket, featuring the ISM Services PMI later during the early North American session. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment for short-term opportunities. The focus, meanwhile, would remain on the release closely-watched US monthly jobs report, popularly known as NFP on Friday.
From a technical perspective, the post-FOMC fall stalled on Tuesday near the 130.40-130.35 confluence support. The mentioned area comprises the 100-day SMA and the 50% Fibonacci retracement level of the April-July rally, which should now act as a key pivotal point. Bullish traders, meanwhile, might wait for some follow-through buying beyond the 134.00 mark before positioning for any further gains. The USD/JPY pair could then accelerate the momentum towards the 134.75 intermediate hurdle en-route the 135.00 psychological mark. This is closely followed by the 23.6% Fibo. level, around the 135.15 region, which if cleared decisively would suggest that the recent decline has run its course and pave the way for additional gains.
On the flip side, the 38.2% Fibo. level, around mid-132.00s, now seems to protect the immediate downside ahead of the 132.00 round figure and the 131.65-131.60 region. Failure to defend the said support levels could drag the USD/JPY pair back below the 131.00 mark, towards retesting the 130.40-130.35 confluence support. A convincing break below the latter would be seen as a fresh trigger for bearish traders and set the stage for an extension of the recent corrective slide from the 24-year peak touched on July 14.
Read AUD seeks support