USD/JPY, GBP/JPY Struggle for Fresh Highs as FX Intervention Fear Lingers

USD/JPY, GBP/JPY FORECAST:

JPY FORECAST: NEUTRAL

• Yen Losses Continue to be Capped as FX Intervention Fears Linger.
• A Busy Week on the Calendar but No High-Risk Event Which Could Impact the Overall Sentiment and Outlook with the BoJ Summary of Opinions and US CPI the Main Ones to Watch Out For.
• IG Client Sentiment Shows Retail Traders Extremely Bearish on Both USDJPY and GBPJPY.
• To Learn More About Price Action,Chart PatternsandMoving Averages, Check out theDailyFX Education Series.

MOST READ: EUR/USD Continues to Slide as EUR/JPY Retreats from YTD High, What Next?

THE WEEK IN REVIEW

The Yen continued to struggle against the US Dollar this week despite holding the line and trading flat against the GBP (at the time of writing). The contrasting performance could in part be explained by a robust US Dollar and a weaker GBP this week, surprising given the 25bps hike by the Bank of England (BoE).

The lack of bullish continuation for GBP/JPY could be down to market participants having largely priced in a 25bps hike by the BoE with Governor Bailey sending mixed messages in his statement with the probability of another hike in September resting around the 60% mark.

The Bank of Japan (BoJ) surprised markets last week with a tweak to the Yield Curve Control (YCC) policy despite ongoing rhetoric which suggested no change was in the offing. The lack of clarity and mixed messaging is likely to keep market participants on their toes to the possible likelihood of FX intervention should the Yen continue to weaken.

BoJ comments suggest only excessive moves would warrant an FX intervention, however given the surprise around the YCC policy market participants may take comments by the BoJ with a grain of salt moving forward. The Bank of Japan (BoJ) stepped in yesterday to buy Government Bonds as USD/JPY marched toward the psychological 145.00 mark and the 10Y yield hit 0.655%. Given the move any meaningful break of recent highs in GBP/JPY and USD/JPY may be a pipe dream and could see JPY bulls defend these levels.

Japanese 10Y Yield

Source: Refinitiv

THE WEEK AHEAD: UK GDP, US INFLATION, BOJ SUMMARY OF OPINIONS AND ECO WATCHERS SURVEY

Heading into next week and risk events are a bit lighter than the past 3 weeks. We do have a host of medium impact risk event out of Japan with the BoJ summary of opinions and the Eco Watchers Survey of particular interest. Considering the tweak to YCC policy market participants will no doubt want to hear the BoJ opinion and deliberations which led to the decision as well as any changes to the policy path moving forward.

The Economy Watchers Current Index measures the current mood of businesses that directly services consumers, such as barbers, taxi drivers, and waiters and could give us an indication of the state of the economy on the ground as the BoJ looks for sustainable wage and earnings growth. Lastly, we have some PPI data as well with Japan not experiencing the runaway inflation experienced by its G7 counterparts, it remains uncomfortably high for the BoJ and Japanese Government, with PPI likely to give us a peak at whether price pressures will ease further in the weeks and months ahead.

US CPI is also due out next week and is probably the biggest risk event on the calendar. Irrespective of the print I do expect a surge in volatility around the release with the forecast for Core Inflation resting at 4.7%. A print lower than forecast could weigh on the Dollar while a higher print could reignite appetite from USD bulls.

All in all, there are a lot of risk events next week, yet none are expected to significantly alter the current trajectory of markets as market participants continue to bet on an end to the rate hiking cycle globally.

For all market-moving economic releases and events, see the DailyFX Calendar

TECHNICAL OUTLOOK AND FINAL THOUGHTS

The weekly candle for USDJPY is on course to close as an inverted hammer candle below the resistance area around the 142.00 handle. The huge wick to the upside a clear indication of the selling pressure in play the closer USDJPY gets to the psychological 145.00 handle.

USD/JPY Daily Chart – August 4, 2023

Source: TradingView

Dropping down to a daily timeframe and the overall trend remains bullish without a daily candle close below the 139.37 mark (July 28 swing low). With that in mind there is immediate support being provided by the 50-day MA resting at 141.28 with a break lower opening up a retest of the key July 28 swing low at 139.37.

As mentioned above sellers seem to be defending the 145.00 handle at present with any attempt to push toward the level met with significant selling pressure. This is likely down to the FX intervention cloud which continues to hover over Yen pairs as a whole and is likely to cap any significant gains should USDJPY push above the 145.00 mark.

GBP/JPY Daily Chart – August 4, 2023

Source: TradingView

GBPJPY is interesting from a price action perspective. Having topped out around the 184.00 mark the pair staircased its way lower printing lower highs and lower lows. After bottoming out around the 176.35 mark we had a bullish engulfing reversal before a change in structure. The week is ending relatively flat with the weekly candle on course to print a doji close, a sign of the indecisiveness around Yen pairs at present as bulls and bears continue to battle for superiority.

Price is trading at the 20-day MA at present with the 50-day MA resting slightly lower at the 179.80 handle and could keep GBPJPY supported heading into the new week. A daily candle close below the 178.33 mark is needed for bearish trend to resume. Should such a move materialize we could see a quick push toward the 100-day MA resting at 173.50 as we have very little support between the 178.33 and 173.50 handles respectively.

IG CLIENT SENTIMENT

IGCSshows retail traders are 74% net-short in GBP/JPY and 70% net-short in USD/JPY. Download the latest sentiment guides (below) to see how daily and weekly positional changes affect the pair’s outlook.

Written by: Zain Vawda, Market Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda