The Japanese economy grew by 2.2% year-over-year in Q2 according to yesterday's preliminary data, an impressive rebound from the 0.1 contraction of the first quarter (revised form 0.5%). This provides room for the Bank of Japan to start thinking of a less dovish path, but officials have not shown any such inclination, despite the recent inflation rise.
CPI excluding fresh food, had surpassed the central bank's 2% target in April and has remained above this level since. Markets now expect the latest inflation figures, which are released on Friday. On Wednesday, investors will seek more insights into the Fed's thinking with the accounts of the last policy decision, which could determine the next leg of USD/JPY.
Expectations around the central bank's next move have eased after the softer inflation data last week, as headline CPI moderated to +8.5% year-over-year in July. At the time of writing, CME's FedWatch Tool projects a smaller 0.5% rate hike in September, with 61.5% probability. 
This cool-down in inflation and market pricing around the Fed's tightening path, pushed USD/JPY into a negative, week. As we had pointed out in our last analysis however, it is hard to justify more weakness, given the stark policy differential and important technical levels.
Since then, the greenback has defended the 38.2% Fibonacci of this year's Low/High rally (129.48) and the lower border of the daily Ichimoku Cloud. It maintains its ability to return above the EMA 200 (black line) and push for new monthly highs (135.59), whereas sustained strength that will allow it look towards 139.41 is not easy in the near-term.
On the other hand, USD/JPY had failed to clear the EMA200 during the early-August bounce and below this level, it is in a precarious position. As such, we could see a retest of mid-131.00s, but the 130-38-129-48 region is distant at this stage.
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.
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