Japanese Yen Forecast: USD/JPY, EUR/JPY at the Mercy of Intervention

USD/JPY, EUR/JPY FORECAST:

JPY FORECAST: NEUTRAL

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READ MORE: Bank of Japan (BoJ) – Foreign Exchange Market Intervention

THE WEEK IN REVIEW

The Yen continued to struggle for a second successive weeks with losses against both the Euro and US Dollar. EUR/JPY in particular reaching its previous YTD highs around the 158.000 handle on Friday as news filtered through that the BoJ were likely to keep the Yield Curve Control (YCC) policy as it at its upcoming meeting.

This was followed by comments from the Bank of Japan (BoJ) who stated that they see little need to act right now. Japanese officials have been keeping market participants largely on edge over the past few weeks with further comments on Friday setting off whipsaw price action ahead of a busy 2 weeks of Central Bank meetings. Japan’s top currency diplomat Kanda reiterating that Japanese officials continue to monitor the FX markets with a sense of urgency with the BoJ makings judgements based on data. Kanda also acknowledged the current speculation which has dragged on for months and only intensified in the lead up to the BoJ meeting regarding a potential policy shift.

Governor Ueda for his part has largely maintained a dovish rhetoric but the idea and consensus among analysts has been that Ueda was brought in was to usher in a new era of policy normalization. So far, the biggest step he has taken is to initiate a policy review which is expected to be completed in the next 12-18 months. For now, though it appears the BoJ and Japanese officials are likely to keep market participants guessing with FX intervention likely to be the only thing Japanese Yen bulls will be able to cheer.

JAPANESE INFLATION AND BALANCE OF TRADE DATA

Source: DailyFX.Com

Japanese data this past week came in largely on the positive side with headline inflation falling slightly but core inflation ticked higher to 3.3%. Inflation has exceeded the BoJ’s target of 2% for more than a year and yet no respite on the monetary policy front in the short-term as the BoJ eyes wage growth as a key area for now. With this in mind the Balance of Trade data indicated a trade surplus in the month of June which couldlead to wage growth down the line should the demand for Japanese goods remain elevated moving forward. This is a rare positive for the BoJ in what has been a challenging few months.

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THE WEEK AHEAD: CENTRAL BANKS TAKE CENTER STAGE

Heading into next week and Central Bank meetings will no doubt dominate proceedings as we have the European Central Bank (ECB), US Federal Reserve (FED) and of course to wrap it all up the Bank of Japan (BoJ). Market participants have a pretty clear picture of what to expect heading into the meetings, but it is the projections moving forward which are likely to gain the most interest.

Market participants are still debating whether this will be the peak rate for the US Federal Reserve while recent comments by ECB officials show uncertainty for the first time this year on whether more hikes will be needed. Now obviously a pause or a perceived peak rate from both the ECB and the Fed could work in the Yens favor and hamper the Euro and US Dollar respectively.

I do not see significant losses ahead for the Yen mostly down to the fact that intervention talk seems to be offering the Yen support. Should we see losses accelerate beyond the 2% mark for the day on either USD/JPY or EUR/JPY I expect the BoJ to intervene which could start a larger drop similar to the one witnessed in October 2022.

Here are the three high ‘rated’ risk events for the week ahead on the economic calendar which could affect JPY Pairs and lead to a spike in volatility:

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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 a bullish engulfing candlestick following an impressive bounce off a key confluence area around the 137.50 handle. The 137.50 handle had served as a key resistance area in December 2022 and March and May of 2023 with the 50-day MA resting there as well. The bullish engulfing candle off support hints at further upside in the week ahead.

USD/JPY Daily Chart – July 21, 2023

Source: TradingView

Dropping down to a daily timeframe and we are extremely bullish as well as we look set to close above the 50-day MA resting at the 140.60 handle. We have tapped into another area of resistance around the 142.00 handle before a small pullback. Wednesday did see a golden cross pattern form as well which served as a sort of precursor to the end of week rally. The 142.00 handle does need to be cleared if USD/JPY is going to return to the YTD high around the 145.00 handle. As mentioned earlier and I will reiterate it here, a move toward the 145.00 mark or higher may be met with FX intervention by the BoJ or comments which could result in whipsaw price action.

EUR/JPY Daily Chart – July 21, 2023

Source: TradingView

EURJPY has already run into the YTD high on a Friday with a retest of the 158.00 mark and looks more likely to accelerate higher at this point. The weekly timeframe is also on course for a Morningstar candlestick formation which would hint at further upside and perhaps a test of the 160.00 psychological mark early in the week.

Looking at IG Client Sentiment Data and we can see that retail traders are currently net SHORT on EURJPY with 79% of traders holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment meaning we could see EURJPY prices continue to RISE following a short retracement.