• USD/JPY rebounds from 109.80 support, 50-day moving average.
  • BOJ keeps policy stable, cuts growth forecast for 2021.
  • Fed Chair Powell admits inflation, says in active consideration of economic progress.
  • FXStreet Forecast Poll sees modest USD/JPY strength ahead.

American economic growth is expected to be twice as fast as Japan’s and that prospect has been a main support for the dollar throughout the first half of the year.

The USD/JPY barely stirred on the week, opening at 110.13 and concluding at 110.14. Policy and comments from the Bank of Japan (BOJ) and the Federal Reserve illustrated that the diverging paths of the two economies will elicit no immediate changes from either institution.

Japan’s central bank left its base rate unchanged at 0.1% in its decision on Friday while reducing its 2021 growth estimate to 3.8% from 4%. The Fed’s 2021 projection had climbed to 7% from 6.5% in its forecasts updated on June 16. 

“Japan's economy is likely to gradually recover as vaccinations progress and the impact of the pandemic subsides," BOJ Governor Haruhiko Kuroda told the news conference following the policy announcement. 

In the US, Federal Reserve Chair Jerome Powell kept the bank’s juggling act intact in two days of Capitol Hill testimony. 

Appearing in his mandated Semiannual Monetary Policy Report to Congress, Mr. Powell admitted that US inflation is well above target, that the bank is in “active consideration” of the economy’s progress and that “there is still a long way to go” before a policy change. 

Treasury rates which had jumped on Tuesday with the US Consumer Price Index June release of 5.4%, settled back on Wednesday with the yield curve slightly flattening as the week ended. 

Japanese statistics were mixed. The Producer Price Index rose more than expected for the year in June but Industrial Production was slower than projected on the month and year in May. The Tertiary Index of the domestic service sector also weakened in May. 

In the US, consumer and producer price inflation was much higher than forecast in June and the Fed’s Beige Book survey of the economy, prepared for the July 27-28 FOMC meeting, noted the difficulties employers are having finding help.

Initial Jobless Claims dropped to a new pandemic low and Industrial Production saw half the expected gain in June. 

In the most reassuring US statistic of the week, Retail Sales in June were far stronger than projected, though the news was tempered by negative revisions to all categories for May. Consumer Sentiment was much softer in June than forecast in what may be the first sign of inflation’s impact on outlook.

USD/JPY outlook

The USD/JPY, despite its lackluster performance over the last month, has to be considered a buy given the diverging paths of the Japanese and US economies. Fundamentals overwhelmingly favor the dollar even if the Federal Reserve is far from eager to confront its mistakes in inflation estimates. 

The massive deficit spending coming out of Washington, something the Fed was avidly requesting early in the lockdowns, in an expanding economy beset by labor and product shortages, can only exacerbate the inflation problem. The Fed’s reluctance to change policy will have a negative impact on inflation expectations, as consumers see the central bank tolerant of the rapid price increases they deal with every day. "Active consideration” of the country’s economic progress will likely turn to tapering the bond program at the Fed’s August Jackson Hole symposium. 

The technical support available to the USD/JPY is another reason for optimism on the pair. The quick rebound from the closest band at 109.80-85, backed up by the 50-day moving average, is indicative of the recurring support lines that exist down to 107.50. 

American and Japanese statistics are thin in the week ahead. National CPI in Japan for June is expected to offer little relief from deflation. Information from the US housing market is on tap with continued stronger performance expected. Neither will move markets.

A substantial move higher in the USD/JPY will probably await an acknowledged change in US interest rate policy, but the trade bias is unmistakably for purchase. 

Japan statistics July 12–July 16


US statistics July 12-July 16

Japan statistics July 19–July 23


US statistics July 19–July 23


USD/JPY technical outlook

The MACD which dipped to negative over a week ago, probably overstates selling potential as the point decline has been relatively minor and the technical support structure for the next two figures is substantial. The Relative Strength Index (RSI) which is near neutral, gives a more realistic picture of the USD/JPY prospects as does the True Range, which shows a slight uptick. In this case the waning upward momentum does not equal a likely drop in the USD/JPY.  A lack of fresh buying motivation does not undermine the overall upward bias nor does it create selling logic. 

The support line at 109.80 which provided the end of the week rebound is also the base of a modest head-and-shoulders pattern from July 8 to July 16 and coincident with the 50-day moving average (MA) at 109.81. Support lines are closely spaced for the next 150 points then spread out to 107.50. Resistance is less formidable but it is somewhat improved by the long climb from January and the minimal profit-taking. 

Resistance: 110.30, 110.65, 111.00, 111.50

Support: 109.80, 109.65, 109.35, 109.00, 108.80, 108.50, 108.00, 107.50

FXStreet USD/JPY Forecast Poll

The FXStreet Forecast Poll reflects the technical strength of the USD/JPY with its elaborate and tested support structure providing a base for future advances. 


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