USD/JPY Price Forecast: Rallies amid weaker JPY, notable USD buying ahead of US ISM PMI

The USD/JPY pair rebounds over 90 pips from the 146.60 area, or a nearly two-week low touched earlier this Tuesday, and refreshes daily peak during the first half of the European session. The US Dollar (USD) regains positive traction and recovers a part of Friday's weaker-than-expected US jobs data-inspired losses. Furthermore, a broadly weaker Japanese Yen (JPY) turns out to be another factor acting as a tailwind for the currency pair.

The fundamental backdrop, however, warrants some caution for aggressive bullish traders and positioning for any meaningful appreciating move. The ruling Liberal Democratic Party’s loss in the July 20 polls fueled concerns about Japan's fiscal health amid calls from the opposition to boost spending and cut taxes. This suggests that prospects for the Bank of Japan (BoJ) rate hikes could be delayed further. Moreover, BoJ Governor Kazuo Ueda last week downplayed inflation risks and signaled continued policy patience. This, along with the upbeat market mood, turned out to be key factors undermining the safe-haven Japanese Yen (JPY).

Meanwhile, the BoJ revised its inflation forecast at the end of the July meeting last week, and reiterated that it will hike interest rates further if growth and inflation continue to advance in line with its estimates. Adding to this, the Minutes of the June BoJ meeting released earlier today revealed that policymakers saw scope to resume interest rate increases once trade friction caused by US tariffs eased. This keeps hopes alive for an imminent interest rate hike by the end of this year. This marks a big divergence in comparison to dovish Federal Reserve (Fed) expectations, which should limit the JPY losses and cap the USD/JPY pair.

Traders ramped up their bets for rate cuts by the Fed following the release of the US Nonfarm Payrolls report on Friday, which pointed to a sharp deterioration in labor market conditions. According to the CME Group's FedWatch Tool, traders now see over a 90% chance that the Fed will lower borrowing costs in September. Moreover, the US Commerce Department's Census Bureau reported on Monday that Factory Orders plunged 4.8% in June following an upwardly revised 8.3% rise in the previous month. This, along with concerns about the Fed's independence, should act as a headwind for the buck and the USD/JPY pair.

In fact, US President Donald Trump ordered the firing of the head of the Bureau of Labor Statistics hours after the dismal employment details. Moreover, Fed Governor Adriana Kugler resigned from her position on the central bank’s board. This comes amid relentless political pressure on Fed Chair Jerome Powell to lower borrowing costs and warrants some caution for the USD bulls. Traders now look forward to the release of the US ISM Services PMI, which, along with speeches from FOMC members, will influence the USD price dynamics. Apart from this, the broader risk sentiment should provide some impetus to the USD/JPY pair.

USD/JPY 4-hour chart

Technical Outlook

An intraday resilience below the 50% retracement level of the rally from the July swing low and the subsequent recovery warrants caution for the USD/JPY bears. Meanwhile, neutral oscillators on the daily chart suggest that any further recovery is more likely to confront an immediate hurdle near the 147.75 region, or the 38.2% Fibonacci retracement level. This is closely followed by the 148.00 round figure, which, if cleared, will suggest that spot prices have formed a near-term bottom and shift the bias in favor of bullish traders.

On the flip side, the 50% retracement level, around the 146.85 region, which coincides with the 200-period Simple Moving Average (SMA) on the 4-hour chart, now seems to act as an immediate support ahead of the daily swing low, around the 146.60 area. Some follow-through selling below the latter could make the USD/JPY pair vulnerable to accelerate the fall towards the 146.00 round figure. The downward trajectory could extend further and eventually drag spot prices to the 61.8% Fibo. retracement level, around the 145.85 area, en route to the 145.00 psychological mark.