The US dollar against the Japanese yen (USD/JPY) continued to consolidate near elevated levels during Friday's Asian trading session, fluctuating narrowly around the 161.50 mark and remaining in territory not seen in nearly four decades. Despite a further rebound in Tokyo's latest Consumer Price Index (CPI) figures, the market reaction was relatively muted. The overall USD/JPY trend remains strong, poised for a second consecutive weekly gain.
Data released by Japan's Ministry of Internal Affairs and Communications showed Tokyo's core CPI, which excludes fresh food, rose 1.6% year-on-year in June, improving from the 1.3% increase in May. The "core-core" CPI, which strips out both fresh food and energy, climbed to 1.9% from a previous 1.6%. The figures indicate that domestic inflationary pressures in Japan are picking up as imported energy costs gradually filter through to end consumers.
The sustained improvement in inflation has bolstered market expectations for further interest rate hikes by the Bank of Japan. However, the yen has not received a significant boost from this, primarily because the substantial interest rate differential between Japan and the United States remains, keeping carry trades highly attractive and continuing to weigh on the yen. Concurrently, global economic uncertainties stemming from tensions in the Middle East have also dampened market appetite for holding yen.
On another front, tensions in the Middle East have shown signs of flaring up again. Market surveys indicated reports that Iran's Islamic Revolutionary Guard Corps attacked a Singapore-flagged cargo ship transiting the Strait of Hormuz. Following the incident, markets have begun repricing geopolitical risk premiums, driving capital towards safe-haven assets like the US dollar, which further supports the USD/JPY pair at high levels.
However, the scope for further dollar strength is somewhat constrained. Some investors have recently scaled back their bets on additional Federal Reserve rate hikes within the year, tempering bullish dollar sentiment. Furthermore, there is a widespread market belief that if USD/JPY persistently approaches or breaches the 162 level, the Japanese government and the Bank of Japan may once again resort to verbal warnings or direct intervention in the foreign exchange market to stabilize the yen. This potential for intervention has kept some investors cautious and has also limited the pace of further rapid appreciation.
Overall, the divergence in monetary policy between the US and Japan remains the core factor influencing the USD/JPY trend. With the Bank of Japan's policy normalization proceeding at a relatively slow pace while the Federal Reserve's rates remain high, the USD/JPY pair is expected to maintain a generally strong bias. However, as the exchange rate approaches historical highs, the risk of policy intervention is increasing, and market volatility is anticipated to rise significantly.
From a daily chart perspective, USD/JPY maintains a pattern of consolidating and moving higher at elevated levels, with the price continuing to trade above key moving averages, indicating the medium-to-long-term bullish trend remains intact. The area near 161.20 constitutes the first significant support level; a break below this could lead to a further test of the 160.50 and 159.80 zones. On the upside, key resistance areas to watch are 162.30, 163.00, and 164.00. A decisive break above 162.30 could see the bullish momentum push towards fresh cycle highs. Nonetheless, as the pair nears historical highs, caution is warranted against the risk of a sharp pullback triggered by intervention from Japanese authorities.
On the 4-hour chart, the pair is maintaining a high-level sideways consolidation. Short-term moving averages continue to trend upwards, and the MACD indicator remains above the zero line, though the red momentum bars have narrowed slightly, suggesting bullish momentum has moderated somewhat while the overall structure remains strong. If the pair can firmly establish itself above 162.00 and break through the 162.30 resistance, it could aim for the 163.00 vicinity. Conversely, a break below the 161.20 support could trigger a phase of technical correction, potentially leading to a further retreat towards the 160.50 area.
Comments