USD/JPY rides wave of short-covering back onto the 107 handle

• USD/JPY rides wave of short-covering following less dovish July expectations from Fed's Bullard.
• "Market stays immediately offered below the near term downtrend at 108.50" - Commerzbank

USD/JPY rallied from the support of the early January lows (bar the flash crash lows) that doubled bottomed in the 106.70s on short-covering following less dovish tones from Federal Reserve speakers.  The pair is also subject to risk sentiment, closely correlated to the U.S. Iran/conflict and the mood around the forthcoming summit between U.S. President Trump and Chinese President Xi which will take the opportunity to do so at the G20 in Japan after negotiations broke off abruptly in May. 

“More likely is that they will agree to a truce, and to restart talks, and in a time-limited way, try to come to some sort of deal within three months, let’s say,”

said Matthew Goodman, a former White House international economics adviser during the Obama administration, who now is at the Center for Strategic and International Studies.

• Iran Deputy Foreign Minister: Iran has no reason left to carry out its nuclear deal commitments unilaterally

However, as one geopolitical tension starts to thaw out, another escalates. Last week, Trump called off a military airstrike at Iranian targets at the last minute to avert a full-blown war between the two nations which would be expected given the number of human Iranian casualties predicted to be in the hundreds subsequent of such an act.  Instead, sanctions directed at Iranian leaders were imposed yesterday and Iran have criticised Trump of which he has responded to today over antagonising Tweets which have weighed the market's risk appetite, fuelling a bid in the yen which has risen to the highest levels since the flash crash at the start of this year.

Fed chat taking the spotlight

However, in recent trade, the greenback has found a strong bid on comments from Federal Reserve's Bullard who argued that the case for a 50 basis rate cut at the July meeting would be too much but he supported the case for a 25 point cut - (a 25 basis point cut is priced in, although a 50 basis point cut seems to now have started to be discounted  - perhaps a prelude for traders as to what to expect on a hawkish 25bp cut at the next meeting, and indeed, on impressive US data or a de-escalation of trade wars and geopolitical risks in the run-up to the meeting). Additional comments also touched on the trade wars: "The U.S. manufacturing sector is being affected by the global trade war," Bullard said and added that he hoped that the Fed's policy action will straight out the yield curve.

Fed's Powell

In more recent trade, we have started to hear comments and statements made by Fed's Powell:

• Powell Speech: Many on FOMC see stronger case for more policy accommodation

• Powell speech: Market's tepid inflation expectations one argument for lower rates

• Powell speech: Better to act preemptively and not let an economic downturn gather steam

There will be a Q&A session where additional comments will come through.

USD/JPY levels 

"Rallies will find solid resistance at the 200-day moving average at 108.26, and the market stays immediately offered below the near term downtrend at 108.50. We look for losses to the 78.6% retracement at 105.87. Above the near term downtrend, minor resistance comes in at the 110.84 April 10 low and the 111.10 200-day moving average. This guard the 2015-2019 112.14 downtrends," analysts at Commerzbank argued.