Japanese Yen remains tepid despite intervention risks, awaits US Retail Sales

The Japanese Yen (JPY) extends its losses on Tuesday with traders remaining on alert after the currency surged about 2% last week on a suspected intervention by Japanese authorities. According to data released by the Bank of Japan (BoJ) on Friday, it’s estimated that Japanese authorities may have spent between ¥3.37 trillion to ¥3.57 trillion on Thursday to stem the rapid depreciation of the JPY, as reported by Reuters.

The US Dollar (USD) strengthens amid rising risk aversion triggered by the attempted assassination of former US President Donald Trump on Saturday. However, cooling US inflation strengthened bets for a Federal Reserve rate cut in September, which may limit the upside of the Greenback. Investors will likely observe the US June Retail Sales data, which are set to be released later today, for further insights.

According to CME Group’s FedWatch Tool, markets now indicate an 85.7% probability of a 25-basis point rate cut at the September Fed meeting, up from 71.0% a week earlier.

Daily Digest Market Movers: Japanese Yen declines despite intervention threats

• Fed Chair Jerome Powell mentioned on Monday that the three US inflation readings of this year “add somewhat to confidence” that inflation is on course to meet the Fed’s target sustainably, suggesting that a shift to interest rate cuts may not be far off.
• Fed Bank of San Francisco President Mary Daly stated that inflation is cooling down in a way that bolsters confidence that it’s on its way to 2%. However, Daly added that more information is needed before making a rate decision.
• US President Joe Biden on Monday addressed the nation from the White House, where he condemned all political violence and called for unity, according to CNBC. Biden further stated that “it’s time to cool it down” and noted not just the weekend attack on Trump but also the possibility of election-year violence on multiple fronts.
• ING’s FX analyst Francesco Pesole observes that Japan’s Ministry of Finance has adjusted its FX intervention strategy. Following the soft US CPI print on Friday, the USD/JPY pair declined approximately 2%, a larger drop compared to other USD pairs. The increase in JPY futures volumes appears to align with indications of FX intervention.
• UBS FX strategists observe that speculative investors hold near-record short positions on the Yen. They suggest that if US economic data continues to indicate a soft landing, USD/JPY could experience periods of pullbacks.
• BBH FX strategists highlight that recent softness in US data poses challenges to their perspective that the backdrop of sustained inflation and strong growth in the US largely remains intact. They note increasing concern among Federal Reserve officials regarding weaknesses in the labor market.
• Japanese Chief Cabinet Secretary Yoshimasa Hayashi stated his readiness to employ all available measures regarding forex. Hayashi noted that the Bank of Japan (BoJ) would determine the specifics of monetary policy. He expects the BoJ to implement appropriate measures to sustainably and steadily achieve the 2% price target, reported by Reuters on Friday.
• On Friday, Japanese Finance Minister Shunichi Suzuki emphasized that rapid foreign exchange (FX) movements are undesirable. Suzuki refrained from commenting on FX intervention and declined to address media reports regarding Japan’s FX rate checks, as reported by Reuters.

Technical Analysis: USD/JPY breaks above 158.50

USD/JPY trades around 158.70 on Tuesday. The daily chart analysis indicates a reinforcement of the bullish bias as the pair rises toward the lower boundary of an ascending channel pattern. The 14-day Relative Strength Index (RSI) is also slightly below the 50 level. A further increase could strengthen the bullish trend.

The immediate resistance is observed around the nine-day Exponential Moving Average (EMA) at 159.46, followed by the lower boundary of the ascending channel around 160.30. A return to trading within the ascending channel would likely improve sentiment for the USD/JPY pair, with a potential target toward the upper boundary of the ascending channel near 163.70.

On the downside, the USD/JPY pair could find key support around the psychological level of 158.00. A break below this level could exert pressure on the pair to navigate the region around June’s low at 154.55.

USD/JPY: Daily Chart