USD/JPY Forecast: Attempted recovery runs the risk of fizzling out quickly, FOCM minutes eyed

The USD/JPY pair shows some resilience below the 145.00 psychological mark and staged a goodish intraday recovery from a two-week low touched earlier this Wednesday. Spot prices, for now, seem to have snapped a three-day losing streak, albeit struggled to capitalize on the move and remained below the 146.00 mark through the first half of the European session. The Japanese Yen (JPY) started losing traction after data released earlier today showed that Japan's trade deficit ballooned to ¥621.84 billion in July amid disruptions in manufacturing output that led to a smaller-than-expected rise in exports. This overshadowed a 16.6% jump in imports, which pointed to improving domestic demand. 

Furthermore, the political uncertainty fueled by Japanese Prime Minister Fumio Kishida's decision to step down could pause the Bank of Japan's (BoJ) plan to raise interest rates. This further seems to undermine the JPY, which, along with a modest US Dollar (USD) rebound from its lowest level since January, acts as a tailwind for the USD/JPY pair. The USD uptick, meanwhile, could be attributed to some short-covering ahead of the July FOMC meeting minutes, due later today. Apart from this, Federal Reserve (Fed) Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday will be scrutinized for cues about the central bank's rate cut path and some meaningful impetus.

In the meantime, growing acceptance that the Fed will begin its policy easing cycle soon amid cooling inflation should keep a lid on the attempted USD recovery and cap the USD/JPY pair. Fed Governor Michelle Bowman tried to temper expectations of a near-term rate cut and said that despite the recent progress, price growth levels remain well-elevated and still uncomfortably above the central bank's 2% goal. The markets, however, are still pricing in just over a 70% chance that the US central bank will cut rates by 25 basis points (bps) in September.  Moreover, a Reuters poll showed that a slim majority of economists expect the Fed to cut rates by 25 bps at each of the remaining three meetings of 2024. 

The dovish outlook keeps the US Treasury bond yields depressed, which might hold the USD bulls from placing aggressive bets. Meanwhile, investors seem convinced that an improving macroeconomic environment in Japan should encourage the BoJ to raise interest rates again later this year. This, along with persistent geopolitical risks and a slight deterioration in the global risk sentiment, should help limit any meaningful JPY downfall. Hence, it will be prudent to wait for strong follow-through buying before confirming that the USD/JPY pair has bottomed out and positioning for any meaningful appreciating move in the near term. 

Technical Outlook

From a technical perspective, this week's breakdown below the 200-hour Simple Moving Average (SMA) and the USD/JPY pair's inability to build on the intraday bounce beyond the 23.6% Fibonacci retracement level the recent fall since last Friday warrant caution for bulls. Moreover, oscillators on the daily chart are holding deep in negative territory and have also recovered from the oversold zone, suggesting that the path of least resistance for spot prices is to the downside. 

Hence, any subsequent move up could face stiff resistance near the 146.65 region or the 38.2% Fibo. level. The momentum could extend further beyond the 147.00 mark, though is likely to remain capped near the 147.15 confluence hurdle – comprising the 50% Fibo. level, 100 and 200-hour SMAs. The latter should act as a key pivotal point, which if cleared decisively should pave the way for additional gains towards the 147.70 region, or the 61.8% Fibo. level, en route to the 148.00 round figure.

On the flip side, immediate support is pegged near the 145.45-145.40 area ahead of the 145.00 psychological mark. A convincing break below will be seen as a fresh trigger for bearish traders and drag the USD/JPY pair to the next relevant support near the 144.20-144.15 region. Some follow-through selling below the 144.00 round figure should pave the way for a slide towards the 143.60 intermediate support en route to the 143.00 mark.

USD/JPY 1-hour chart