Last week, the USD/JPY pair crossed the psychological level of 145, significantly increasing threats from Tokyo towards speculators betting on the depreciation of the Japanese currency. Against this backdrop, USD/JPY entered a downward correction. How long will this sideways movement last and when can we expect another surge?
Monetary divergence vs. currency intervention
Like last year, the dollar/yen traders have found themselves in an unfavorable position once again. Currently, the dollar bulls are holding a trump card but unable to use it due to fears of currency intervention.
The primary advantage, of course, is the monetary divergence between the United States and Japan. As a reminder, in 2022, a significant disparity in monetary policies between these two countries led to a sharp rise in the dollar against the yen.
At the beginning of this year, the Japanese currency managed to recover slightly against USD as speculations arose in the market regarding a possible turn in the policies of the Federal Reserve and the Bank of Japan.
Now it has become entirely evident that both regulators do not intend to change their monetary course in the near future, so the yen is once again under pressure.
Last month, the head of the US central bank, Jerome Powell, made it clear that the Federal Reserve will not lower interest rates this year due to the risk of sustained inflation. On the contrary, the regulator plans to implement two additional rounds of tightening.
Meanwhile, the Bank of Japan stated at its June meeting that it intends to maintain the current ultra-loose monetary policy until inflation stabilizes at the level of 2%. Later, several Japanese officials ruled out the need for an urgent change in the yield curve control mechanism.
All of this led to another devaluation in the yen. Last week, the dollar rose against its Japanese counterpart to 145.07, its highest level since November 2022.
As USD/JPY approached the important threshold, the Japanese government started to voice concerns over the situation. Last Friday, Japan's Minister of Finance Shunichi Suzuki warned currency speculators against sharp and one-sided movements in the market, stating that Tokyo would take appropriate measures in case of extreme weakening of the yen.
Fears of a repeat of last year's scenario when Japanese authorities moved from words to action and actually intervened in the market caused the dollar bulls to give up some of their gains and retreat below the key level of 145.
At the beginning of the new week, the USD/JPY pair continues to trade in a descending sideways channel. On Tuesday morning, it dropped by 0.17% to the level of 144.42.
The quote came under pressure from another warning about currency intervention. At the start of the day, Japan's chief currency diplomat Masato Kanda stated that Tokyo is discussing the current situation in the currency market with US Secretary of the Treasury Janet Yellen and other foreign officials.
"This is nothing but a hint of coordinated intervention, which is, of course, extremely bad for the USD/JPY pair since coordinated intervention usually has a longer-lasting impact on the yen than a unilateral intervention would have," shared analyst Charu Chanana.
Experts believe that investors' fear of coordinated intervention may become the main factor restraining the growth of the USD/JPY pair in the short term.
According to their forecasts, the pair will remain in a descending corrective channel as there are currently no strong triggers. Today, the US markets are closed for Independence Day, and the only notable event on tomorrow's calendar is the release of the minutes from the June FOMC meeting.
Most analysts are confident that the Fed minutes are unlikely to reveal anything fundamentally new or sensational to the market, so the movement of the USD/JPY pair will likely be modest. However, by the end of the week, the pair may once again demonstrate another surge.
On Friday, employment data for the previous month is expected to be released in the US. If the June nonfarm payrolls (NFP) turn out to be strong, it will strengthen traders' confidence in the hawkish determination of the Federal Reserve, serving as an excellent catalyst for the dollar.
Currently, Bloomberg economists forecast that the NFP report will show more moderate but still healthy growth in the US labor market. They expect nonfarm payrolls to have increased by 225,000 in June, while the unemployment rate should drop from 3.7% to 3.6%.
"We believe that the June data will be in line with recent reports indicating sustained growth in the US economy. This will help the Fed maintain its aggressive stance and continue to fight inflation by raising rates," shared Bloomberg Economics experts.
If the consensus comes true and we do see a strong employment release, the greenback is likely to show parabolic growth in all directions, including against JPY, towards the end of the week.
Technical analysis
USD/JPY bulls are losing momentum due to several factors such as overbought RSI signals, the formation of a lower high around the multi-day peak, and a breakout below the ascending support line from three weeks ago, which now acts as immediate resistance near 144.70.
However, if buyers manage to rise above the 145.00-146.10 area in the near future, it could open a fairly rapid path to new highs. According to SocGen strategists, a breakthrough of this resistance will give a strong boost to the dollar bulls, leading the quote first to the 149 level and then to the previous high of 152.
