The US dollar/yen exchange rate posted its worst weekly performance since January as the US Dollar Index (DXY) continued its decline. It has fallen six days in a row and is currently trading at its lowest since May 24. In total, they are down more than 4.5% from their high this year.
DXY index slip
USD/JPY prices continued to fall after a series of weak economic data from the US. Friday’s economic data revealed that the labor market is softening. In the same month, the economy added more than 209,000 jobs, below the median forecast of 230,000.
A separate report released on Wednesday showed that inflation in the country is trending downward. The headline consumer price index (CPI) fell to 3.0% in June from 4.1% in May. If this trend continues, it means headline CPI will drop to the Fed’s 2.0% target within the next few months.
The risk for the Fed is that U.S. inflation could fall below zero early this year. Such a move will likely force the central bank to undo some of its recent rate hikes in an effort to spur inflation and spur economic growth.
Most analysts now expect the Fed to raise rates by 0.25% this month, followed by a long pause.
Looking ahead, the next big trigger for the USD/JPY price will be the BOJ and Fed interest rate decisions this month. The Fed will end its board meeting on July 26th, followed by the BOJ board meeting on July 28th.
With domestic inflation also falling, I suspect the BoJ will keep rates on hold and maintain a dovish stance. ING analysts said in a note:
“In short, this USD/JPY move appears to be driven by the private sector rather than the public sector (i.e. no intervention) and around 138.25 looks like a short-term target for USD/JPY.”
USD/JPY Forecast
The US dollar to Japanese yen exchange rate has been in a strong downward trend for the past few weeks. We were able to navigate below the ascending channel shown in green. It is also below the 25-day and 50-day moving averages.
Most importantly, the pair retested the critical support level of 137.80, the highest level on March 8. The Relative Strength Index (RSI) is approaching oversold levels. So I suspect the selling will slow down and start retesting the lower side of the channel.
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