USD/JPY: Dollar likely to rebound again

After Monday’s rebound, the US dollar has started Tuesday’s session on the backfoot, although it remains to be seen whether the bears have much conviction in this down move. The bulls could step back in after Monday’s large recovery raised some hope that the recent weakness had ran its course. The USD/JPY is one of the more interesting dollar pairs to watch in this data-light session, as it tests a key support level.

Monday’s greenback recovery was supported by a rebound in US bond yields, which have fallen back today, after the publication of some more stronger-than-expected macro pointers following Friday’s stronger jobs and wages data. Factory orders surged by more than expected, rising 1% month-on-month, while the closely-followed ISM services PMI came in at 56.5 compared to 53.3 expected and 54.4 last.

There are no notable US data scheduled for release today. But the recent trend of stronger data has seen some investors re-question the market pricing of the terminal interest rates in the US, currently priced in at just below 5%. If incoming data continues to remain favourable, then inflation is likely to persist longer and that may encourage the Fed to be even more reluctant to pause its hiking early in the first half of 2023.

As we have been banging on about it, the USD/JPY has bounced back sharply in the last few trading sessions, although it was down again when this report was being written. However, the popular currency pair was testing a key support level around 136.00. This level was the high from Friday, which was taken out on Monday.

Thus, if Monday’s reversal was a genuine one, then I would expect the bulls to step in and defend their ground here, potentially leading to a move towards the next level of resistance around 137.60, which was the base of the recent breakdown.

In terms of the slightly longer-term outlook, a closing break out side of the bearish channel is needed in order to tempt more bulls to come back and trade this pair long, after it successfully held above the 200-day average at 134.50ish.

From a macro perspective, the long-term trend on the USD/JPY remains bullish. Its more recent weakness was driven by investors reducing their high expectations about the future growth in policy divergence between the US and Japan. Signs of inflation potentially peaking and the Fed dialling down its hawkish rhetoric has seen the markets reduce their expectations of terminal interest rates in the US. But the Fed’s policy remains in contractionary mode, while the BoJ maintains its extremely dovish stance. This should mean the downside risks will be limited for the USD/JPY moving forward, as long as the BoJ does not materially change its policy settings.

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.