USD/JPY dips but still bullish; faster BoJ tightening required for trend change

USD:

The greenback rallied broadly on Friday after Fed Chair Warsh delivered a hawkish address at the Jackson Hole Symposium.

The crucial remark was his statement:

I would be hard pressed to describe broad financial conditions as restrictive.

Investors took this as a signal that he was pushing back against the recent loosening of financial conditions, prompting a retightening.

This dynamic has prolonged the pullback in "debasement" trades, with the dollar back to levels seen before the US Treasury announcement. The probability of a rate hike at the September meeting has also risen, with the market now pricing in a 67% chance.

Warsh also repeated that the Fed is entirely focused on inflation and noted that progress has been slow. Consequently, I believe only a soft US CPI report could push the probabilities below 50% and prevent the Fed from hiking at the next meeting.

If the probabilities remain at or above 50%, the Fed may be compelled to hike anyway, as not hiking would send a dovish signal.

JPY:

The yen strengthened, reportedly due to hawkish comments from BoJ's Takata. I do not believe that was the reason, as Takata is a known hawk. Interest rate expectations were mostly unchanged. More likely, there has been profit-taking ahead of the key resistance near 160.50 on USD/JPY.

BoJ Governor Ueda also commented on monetary policy and provided nothing new. In fact, his remarks were somewhat less hawkish than the market had anticipated. The September rate hike is already priced in, so the market will not react to that.

Traders will look to forward guidance and hints of a faster pace. The trend is unlikely to reverse without a dovish repricing of Fed rate expectations or a faster pace of BoJ tightening.

USDJPY Technical Analysis – Daily Timeframe

USDJPY has reached the key resistance zone around the 160.50 level. That is where sellers are expected to step in with a defined risk above resistance to position for a drop to the 155.00 handle. Buyers, on the other hand, will want to see the price break higher to increase bullish bets towards the 164.00 level next.

USDJPY Technical Analysis – 4 Hour Timeframe

An upward trendline defines the bullish momentum. Buyers will likely continue to lean on it with a defined risk below to push into new highs. Sellers, on the other hand, will need a break below the trendline to gain conviction and pile in for a drop to the 155.00 handle.

USDJPY Technical Analysis – 1 Hour Timeframe

The rejection around the trendline and the key swing low around 159.43 are more clearly visible. Sellers will want to see the price break below this support to extend the drop into new lows, while buyers remain in control as long as the price stays above the trendline.

Upcoming Catalysts

Today, the US ADP report is released. Tomorrow, we have Fed's Waller, US Jobless Claims, and US ISM Services PMI. On Friday, the week concludes with the US NFP report.