USD/JPY Extends Losses into the Third Week, Helped by Risk Aversion

  • USDJPY
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USD/JPY Analysis

The US Federal Reserve refrained from giving specific forward guidance after last week's outsized 0.75% rate increase, pivoting instead to a "meeting by meeting" approach. Moreover, Chair Powell tried to prepare markets for a less aggressive stance ahead, noting that it "likely will become appropriate to slow the pace of increases".[1]

This reserved stance along with the two straight quarterly GDP contractions of the US economy, have lowered expectations around the Fed's tightening path, depriving the US Dollar form its main source of strength. However, inflation remains the central bank's top priority and as long as there no signs of retreat, it may be hard to cool-off it rate-hike cycle.

This week sentiment has soured, largely because of the Asia trip of US House Speaker Ms Pelosi, who is widely expected to visit Taiwan, sparking US-China tensions.

USD/JPY has entered its third straight losing week due to the above factors, closing Monday below the Daily Ichimoku Cloud. It now threatens the critical 38.2% Fibonacci of this year's Low/High rally (129.48), although sub-126-42 will need strong conviction.

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In spite of the reduced expectations around the Fed, we find hard to justify much more USD/JPY weakness, given the stark policy divergence with the Bank of Japan. In addition, the Relative strength Index is at the most oversold levels in two years, which along with the 38.2% Fibonacci can help put a floor under the pair.

If this level is successfully defended, the recent slump is seen as a correction that allows the greenback to resume its broader uptrend. As such, we could see a return above the daily Ichimoku Cloud at around 133.00, but a break above the EMA200 that would negate near-term downside bias, may prove harder for now.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 14 Aug 2022 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20220727.htm

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