{x} | Trading.live

Summary: The USDJPY continued its adjustment below the key 140.00 psychological level on Thursday. The market is now focused on Japan's June inflation report. According to FactSet's consensus forecasts, the overall core Consumer Price Index (CPI) is expected to rise to 3.3%, up from the previous reading of 3.2%.

Fundamentals

Japan is set to release its core CPI for June on Friday. The inflation gauge, excluding fresh food, is projected to increase from 3.2% in May to 3.3%. The core-core index, which excludes both fresh food and energy, closely monitored by the Bank of Japan, is expected to decline from 4.3% to 4.2%.

Unless there are significant surprises, the inflation situation is expected to remain largely unchanged after the release of June's data. Meanwhile, the Bank of Japan is still facing pressure to tighten its policy, with inflation expected to stay above the 2% target for 15 consecutive months. This makes it harder to accept the argument that high inflation is only a temporary phenomenon.

Bank of Japan Governor Kazuo Ueda, who has been in office for a few months, is maintaining the super-loose monetary policy of his predecessor. Ueda stated on Tuesday that the Bank of Japan will continue this policy because "there was still some distance to sustainably and stably achieving the central bank's 2% inflation target."

Ueda's remarks might be aimed at quelling speculation about a policy shift at the Bank of Japan's meeting on July 28. While he acknowledged some improvements in market functioning, the decision to adjust Yield Curve Control (YCC) at this crucial juncture will be more based on fundamentals rather than market functioning.

The market's reaction to Ueda's remarks indicates reduced speculation about YCC adjustments next week. However, we believe that the economic outlook the Bank of Japan announces next week will provide reasons for adjusting YCC. Furthermore, the ideal timing for adjusting YCC is when there is no upward pressure on yields and the range's upper limit of 0.5% is not threatened.

Friday's Japanese CPI data will still be crucial, potentially sparking another round of speculative pricing in the market. But the recent recovery in USDJPY can be understood against the backdrop of improving risk appetite and optimistic sentiments of a soft landing.

At the next central bank meeting next week, the Bank of Japan is unlikely to adjust its monetary policy, as Ueda is likely to maintain a forward guidance approach and not make major policy adjustments without guiding the market.

Last week's speculation about a policy shift at the Bank of Japan was partly attributed to the yen's weakness, which fueled inflation. However, in theory, it was the negative interest rate policy, not Yield Curve Control, that caused the yen to weaken.

From a political standpoint, Prime Minister Fumio Kishida's approval ratings have declined again, and a cabinet reshuffle may take place in mid-September. Kishida may not want any unexpected moves from the Bank of Japan in July.

Technical Analysis

USDJPY accelerated higher on Wednesday, rising to the psychological level of 140.00. After initiating a recovery last Friday, the asset's newfound strength signals a bullish engulfing pattern; however, the formation of a double doji pattern on Monday and Tuesday indicates a potential significant pullback. Nonetheless, the overall structure still maintains a bullish bias.

In the daily timeframe, technical indicators show a mixed picture. The Relative Strength Index (RSI) is in negative territory, while the stochastic oscillator exhibits an upward trend, and moving averages are in a neutral position.

For the bulls to strengthen the upward momentum and trigger further recovery signals, they need a decisive breakthrough above the 140.00 psychological level. However, the critical resistance (downtrend line) remains a strong headwind that could impede the recovery. Failure to convincingly breach the 140.00 level may leave the downside vulnerable.

Overall, while upside resistance persists, downside risks should not be ignored. In terms of strategy, it's recommended to buy the dips, with a focus on not breaking below the previous bottom.

Trading Recommendations

Trading Direction: Long

Entry Price: 138.70

Target Price: 141.71

Stop Loss: 137.20

Valid Until: 2023-08-03 23:55:00

Support: 139.40, 138.43, 137.68, 137.23

Resistance: 140.00, 140.22, 140.71, 141.15