USD/JPY: Bulls holding in there despite risk-off geopolitics, Fed trade supports

• USD/JPY is starting out in Tokyo trade slightly bid, with eyes on Fed expectations.
• Escalating tensions between Tehran-Washington and the US to keep bulls in check.

USD/JPY is starting out in Tokyo trade slightly bid, supported in the high end of the 107 handle despite a risk-off theme surrounding the latest Iran/UK and US risk which heightened at the end of last week. The Federal Reserve is coming up at the end of this month as well and the dialled down prospects of a 50 basis point rate cut has contributed to the Dollar's firmness.

Firstly, the news that the UK's Stena Impero tanker was taken by Iran escalating tensions between Tehran-Washington and the UK. Weekend news has reported through various media that the UK has convened two Cobra meetings to discuss its response, while also consulting other countries.

Iran's ambassador to London, Hamid Baeidinejad, has urged the UK government to contain political forces seeking to turn the dispute into something larger. "UK government should contain those domestic political forces who want to escalate existing tension between Iran and the UK well beyond the issue of ships," Baeidinejad said on Twitter Sunday. "This is quite dangerous and unwise at a sensitive time in the region." 

On the uglier side, The FT reported that Iran-backed terrorist cells could be deployed to launch attacks in the UK if the crisis between London and Tehran deepens:

"Among senior intelligence officers, Iran ranks behind only Russia and China as the nation-state posing the greatest threat to Britain’s national security and the seizure of the UK-flagged oil tanker Stena Impero will have intensified concerns in MI5 and MI6. Intelligence agencies believe Iran has organised and funded sleeper terror cells across Europe including the UK and could greenlight attacks in response to a conflict in the Gulf. The cells are operated by radicals linked to Hizbollah, the Lebanese militant group. Counter-terror police."

Meanwhile, as for the Fed' trade, US yields are a driving force behind USD/JPY's bid. The US 2yr treasury yields rose from 1.78% to 1.83%, while 10yr yields rose from 2.04% to 2.06% on Friday. This followed Fed dove Bullard saying that an easing now would be insurance against a slowdown, but favours a 25bp cut, (rather than 50bp), and doesn't expect the Fed will be entering into an easing cycle. Subsequently, markets priced in 30bp of easing at the 31 July meeting, down from 40bp the previous day.

USD/JPY levels

Valeria Bednarik, the Chief Analyst at FXStreet explained that the USD/JPY pair is technically bearish, as it finished the week around the 23.6% retracement of its July’s decline, having retreated from a second consecutive week from near the 50% retracement of the same decline:

"In the daily chart, the 20 DMA stands pat at around 108.00, reinforcing the figure as resistance, while the 100 and 200 DMA maintain their bearish slopes well above the shorter one."

"Technical indicators hold within negative levels, the Momentum heading marginally lower and the RSI recovering just modestly, not enough to suggest a bottom has been reached."

"In the shorter term, and according to the 4 hours chart, the risk is skewed to the downside, as the pair failed to establish itself above a bearish 20 SMA, while technical indicators barely recovered from overbought levels before losing strength upward."