USD/JPY Upside Back in Play, EUR/JPY Vulnerable

Japanese Yen (USD/JPY, EUR/JPY) Analysis

• Indicator of broader price pressures reach record highs
• IG client sentiment hints at bullish extension
• EUR/JPY breakdown scenario may receive a boost from dovish leaning ECB
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Indicator of Broader Price Pressures Reach Record Highs

While core inflation in Japan slowed for a second consecutive month, another indicator closely watched by Bank of Japan (BoJ) officials suggests rising prices are yet to continue. Based on the consumer price data, the BoJ releases notable insights regarding the distribution of inflation data.

For example, the ‘trimmed mean’ index removes extreme values known as ‘tails’ from the distribution to eliminate the potential for these data points to skew the findings. The trimmed mean index printed a record 3.3% gain in July (YoY).

The most frequently observed rate of inflation, referred to in statistics as the ‘mode’, rose a record 3% compared to June of last year and well above the 2% target. However, analysts polled by Reuters anticipate that ultra-accommodative monetary policy from the Bank is likely to remain at least until the end of Q2 next year. With policy change less of an imminent possibility, the yen could experience an extended period of weakness especially after Japanese Finance Minister Suzuki clarifies that volatility associated with yen declines are undesirable, not the level of the currency itself.

USD/JPY headed back towards the 146.50 high as the US dollar rose in anticipation of Jerome Powell being forces to maintain the hawkish rhetoric in light of stellar US economic performance. With talks of FX intervention dying down and US yields standing firm, 150 becomes the next level of resistance after closing above 146.50 with subsequent momentum. Support rests at 145.00.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

IG Client Sentiment Hints at Bullish Return

IG client sentiment (USD/JPY)

Source: TradingView, prepared by Richard Snow

USD/JPY:Retail trader data shows 22.23% of traders are net-long with the ratio of traders short to long at 3.50 to 1. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

Find out why IG client sentiment is considered a contrarian indicator by reading out dedicated guide below:

EUR/JPY Breakdown Scenario May Receive a Boost from Dovish Leaning ECB

The recent longer-term channel breakdown revealed an overall decline in bullish momentum around 158.00 as prices really struggled to trade consistently above the level. Since then, prices have traded lower, even breaking beneath channel support in a move that could be supported by the changing outlook from within the ECB. Ahead of ECB President Christine Lagarde’s speech at Jackson Hole this evening, ECB ‘sources’ expressed a view that more members of the committee are heading warnings provided by worsening economic data, low or flat growth and weak Chinese data.

Lagarde may not wish to give away too much and will in all likelihood remind everyone of the data dependent approach before each meeting. A 25 bps hike is a 50/50 split according to implied market probabilities, allowing for sizeable repricing risk further down the line. Odds are likely to evolve closer to the time though.

A real test of downside potential would be the prior swing low around 155.50 followed by 153.45. Immediate resistance appears at 158, followed by 159.50.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX