Intervention risks weigh on momentum as USD/JPY approaches the highest level since 1986

FUNDAMENTAL OVERVIEW

USD:

The US dollar continues to be supported following the hawkish Fed dot plot last week as the central bank’s tightening bias led to a hawkish repricing in interest rate expectations.

As a reminder, the Fed delivered a hawkish surprise by projecting a rate hike this year (the consensus was for no cuts or hikes). The market increased rate hike bets with now 38 bps of tightening priced in by year-end. There's a 32% chance of a hike already in July and 68% probability of a move in September.

The economic data and financial markets will now guide the Fed as Warsh stated that “financial markets perform best when they react to incoming data and are less efficient when they have to ask how the Federal Reserve will react to the incoming data”. He added that “financial markets are the most important source of information to guide the central bank”.

Trump also posted on Truth Social and, unlike his usual stance under Fed Chair Powell, did not object to the Fed’s decision. In fact, he said that “rate hikes could happen,” which sounds like a green light for Warsh and the Fed to do whatever they deem necessary.

The signal is that the Fed is finally looking to deliver on its price stability mandate and bring inflation back to the 2% target that it’s been missing since 2021. If the data says they need to hike, they will. This should keep supporting the greenback until the next set of economic data.

JPY:

On the JPY side, we started to see a few spikes recently as the USD/JPY pair reached the highest levels since 2024. It looks more like profit-taking near cycle highs than outright intervention given the size of the moves.

As a reminder, the BoJ hiked the policy rate to 1.00% as widely expected at the last meeting and announced the pause to the bond tapering programme from next fiscal year.

The forward guidance remained the same with the BoJ looking to continue the normalisation process, raising the policy interest rate and adjust the degree of monetary accommodation “in response to developments in economic activity and prices as well as financial conditions”.

BoJ’s Uchida didn’t offer anything new in the press conference reiterating the central bank’s willingness to raise rates further if economic conditions align. The divergence with the Fed will continue to keep the USD/JPY pair skewed to the upside until the US data starts to point in the other direction.

USDJPY TECHNICAL ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can see that USDJPY is trading near the 2024 highs and it’s struggling to break through likely due to intervention fears. A break above the 161.95 level would take the pair to the highest level since 1986. We can expect the sellers to continue to step in around these levels with a defined risk above the 162.00 handle to position for a drop into the 158.00 support. The buyers, on the other hand, will look for a break to increase the bullish bets into new highs.

USDJPY TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we have a minor upward trendline and a support zone around the 160.50 level. This is going to be a key support now. If we get a pullback, we can expect the buyers to step in around the support with a defined risk below it to keep pushing into new highs. The sellers, on the other hand, will look for a break lower to pile in for a drop back into the 158.00 handle next.

USDJPY TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, there’s not much we can add here as from a risk management perspective, the buyers will have a better risk to reward setup around the trendline. The sellers, on the other hand, will need the price to break below the support to open the door for new lows. The red lines define the average daily range for today.

UPCOMING CATALYSTS

Today, we have the US Flash PMIs. On Thursday, we get the US Jobless Claims data and the US PCE report. On Friday, we conclude the week with the Tokyo CPI and the final University of Michigan consumer sentiment survey.