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Summary: Despite the weakening of the U.S. dollar in the foreign exchange market and a decline in U.S. Treasury yields, the USDJPY pair has risen to 144.11, marking a three-day consecutive increase. As of the time of writing, the USDJPY pair touched a daily low of 143.71 before trading at 143.86.

Fundamentals

This week, the lack of Japanese economic data has led investors to focus on the dynamics of the U.S. dollar and anticipate the latest stance from the Bank of Japan (BOJ) regarding policy adjustments, given that most BOJ members have expressed views on yield curve control. Despite discussions about monetary policy normalization, most BOJ members still hold a dovish position.

The unexpected bond purchase operations indicate the central bank's intention to control the rise of Japanese government bond yields. Against the backdrop of rising U.S. Treasury yields, this could limit the near-term downside potential for the USDJPY pair. However, from a broader perspective, the BOJ's decision to relax its Yield Curve Control (YCC) allows long-term yields to rise with improved fundamentals, which is a positive factor for the yen in the medium term.

Meanwhile, mixed signals from the Fed have stirred the market, with officials suggesting both tightening policies and maintaining a stable rate path.

Furthermore, the narrowing trade deficit continues to boost the U.S. dollar, but mixed signals from Fed officials have left investors uncertain about the Fed's path forward. While Fed Governor Michelle Bowman emphasized the need for further tightening, more policymakers are adopting a cautious or neutral stance. For instance, Philadelphia Fed's Harker commented that the Fed might keep rates unchanged unless there is a sudden shift in the direction of recent economic data.

The CME FedWatch tool indicates that market participants expect an 86.5% likelihood of no change in the federal funds rate, reflecting expectations for Fed monetary policy.

Despite a drop in U.S. Treasury yields and overall weakness in the U.S. dollar before the release of U.S. inflation data, the USDJPY pair still retains upward momentum.

The asset continued to rise after briefly surpassing previous highs on Monday, coupled with the formation of a "Harami" candlestick pattern, intensifying the current recovery trend. It could test the year-to-date high of 145.07, but a breakthrough of key resistance levels, such as the psychological level of 144.67, is necessary first. Conversely, if the asset declines, it could test this week's low of 141.50.

Technical Analysis

The USDJPY bulls have found strong support around the 141.50 level and near the 50-day SMA, which has propelled the recent uptrend. However, when observing the performance against the six major USD counterparts, the bulls seem to be winning big. This indicates that the continued rise of the bulls is becoming meaningless.

The current focus is once again on the upper limit around 143.35, as investors eagerly await the release of the U.S. CPI inflation report for July. Nevertheless, as long as the Relative Strength Index (RSI) fluctuates above the neutral 50 level and the MACD remains above the 0-axis, the bulls still hold the advantage. However, given that the RSI appears to be struggling to make new highs, chasing the upside should still be approached with caution.

Whether the bullish trend can extend above 144.67 and the June peak of 145.07 poses another challenging task. A decisive push above these levels could trigger fresh buying interest, propelling the bulls toward the 147.70 level and the resistance line from March, unless the resistance zone around 146.40 from October to November hampers further upside.

Just as our headline suggests, if the bullish momentum persists, it becomes meaningless and could potentially decisively break below 143.35, compelling the bulls to exit and giving rise to a new bearish correction. The 50-day and 20-day SMAs could act as protective barriers, preventing the market from descending further toward the support trendline at 139.15.

On the whole, there's still some bullish momentum for the USDJPY pair, but further gains seem to have lost their purpose. Given the pace at which the trade should have continued its upward trajectory, prices should have retraced lower as part of a correction. However, reality differs. In terms of trading strategy, it is recommended to go short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 143.73

Target Price: 139.39

Stop Loss: 146.00

Valid Until: 2023-08-24 23:55:00

Support: 143.35, 142.25, 142.41, 141.09

Resistance: 144.01, 144.22, 144.67, 145.07