The confirmation of a ceasefire sparked a broad rally across risk assets as oil prices, bond yields and the US dollar all fell back. Yet, the USD/JPY remained stubbornly strong above 16.00 amid record short bets against the yen ahead of a busy week for central banks. With both the BoJ and Fed rate decisions to come, amid a backdrop of easing geopolitical risks and lower oil prices, the USD/JPY forecast could take a bearish tilt this week. It is also now a more favourable time for the Japanese government to intervene again, if monetary policy doesn’t do the trick.
US-Iran deal sends risk assets higher as policymakers return to centre stage
Finally, the US-Iran deal was agreed upon, and markets reacted in the way you’d expect. The prospect of a lasting de-escalation in the Middle East and the anticipated reopening of the Strait of Hormuz means crude oil prices have fallen a further 4-5 percent today, after investors started to price in a favourable outcome in May, when prices fell about 10% from their recent highs. Meanwhile, global equities have welcomed the development too, extending gains that had already been building as investors increasingly priced in a diplomatic resolution. The dollar fell against the likes of the euro, too, but not so much against the pound or yen.
The lack of a more meaningful reaction in the FX space means much of the good news may already be reflected in market pricing, suggesting there may be limited room for an additional dollar weakness.
This implies that the monetary policy will now play a bigger role in determining the direction for the FX markets.
FOMC in focus
With several G10 central banks meeting over the coming days, the key question is whether policymakers still see inflation as big a as they did previously, despite the easing back of energy prices. Wednesday’s Federal Reserve decision could prove particularly important for the direction of the dollar, and therefore the USD/JPY forecast. While the dollar has weakened modestly following the ceasefire announcement, and there is scope for further downside in the near term, the Fed meeting may act as a brake on any more aggressive sell-off.
As mentioned, the monetary policy calendar is exceptionally busy this week. In fact, the Reserve Bank of Australia and the Bank of Japan begin proceedings before attention shifts to meetings from the Federal Reserve, Bank of England, and others.
Could the BoJ deliver meaningful impact the USD/JPY forecast?
The Bank of Japan announces its policy decision on June 16, with a 25-basis-point rate hike largely expected. The key question is whether the BoJ will be hawkish about future policy. Any strong hints of further policy normalisation in the coming months should help to alleviate pressure on the yen.
Indeed, the pressure has been building strongly on the yen as highlighted by the latest COT positioning data. But given the Middle East peace progress, does it still make sense for traders to keep piling on the short bets against the yen? I think profit-taking alone should provide some downward pressure on the USD/JPY pair and the yen stages a potential relief rally. Also, the potential for fresh Japanese authorities intervening in currency markets makes more sense now, as it could be more effective this time around – especially against a backdrop of a more hawkish BoJ and falling oil prices.
But going back to the positioning data, the US dollar bulls tightened their grip on the futures market last week, driving net-long positioning to its highest level in 16 months. At the same time, traders continued to ramp up bearish bets against the Japanese yen, with speculative short exposure reaching fresh extremes. The dollar now also faces fresh profit-taking amid the US-Iran deal.
The key question for the USD/JPY forecast now is whether traders can maintain such aggressive bearish positioning. Much will depend on whether the Bank of Japan adopts a more hawkish stance and delivers another rate hike, or whether the MOF decides to step in and support the currency. Either development could trigger a sharp rebound in the yen, forcing short sellers to unwind positions and putting downward pressure on USD/JPY.
USD/JPY 160.00 could be the new ceiling
Against that backdrop, I can’t see the USD/JPY breaking sharply above the 160.00 key level. The April high sits at 160.72 while the July 2024 high is at 161.95.
Meanwhile, on the downside, immediate short-term support and 21-day exponential moving average sits at around 159.50ish to 159.70ish on the USD/JPY chart.
Below this, 159.00 is the next short-term support, following by the 157.50-158.00 area – this being the convergence point of the support trend of the long-term bullish channel and prior resistance-turned-support area. I’d like to see a break below this zone to declare an end the bullish USD/JPY forecast from a tactical standpoint.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
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