• USD/JPY forecast: Holiday-thinned liquidity keeps intervention risks firmly in focus
• Softer US labour market data has weighed on the dollar, but it is unlikely to trigger a sustained decline without further evidence of economic weakness
• Markets are increasingly alert to the possibility of further action from Japanese authorities if USD/JPY resumes its climb

 

Dollar loses momentum – for now

 

The latest US employment figures have taken some of the shine off the dollar, yet the report falls short of signalling a decisive shift in the long-dollar narrative. The Fed’s policy outlook still favours a rate hike later this year, although much will depend on the direction of inflation. But the employment report was certainly not positive, given that there were also sizeable downward revisions to previous months data.  Meanwhile, the decline in the unemployment rate was flattered by a fall in labour force participation rather than stronger employment, suggesting some workers are leaving the job market altogether rather than finding new jobs.

 

For FX investors, the NFP report makes it difficult to justify expectations of multiple Fed tightening later this year. However, it is equally difficult to argue that it is weak enough to encourage aggressive pricing of rate cuts. Markets have trimmed some of their hawkish expectations as you’d expect and this is already reflected in the dollar falling across the board. But there is still room for investors to maintain a cautious stance ahead of the next US inflation report.

 

With US financial markets closed for the Independence Day holiday, trading conditions will be considerably thinner today. Reduced liquidity often exaggerates price swings and creates favourable conditions for official intervention in the foreign exchange market…

 

USD/JPY forecast: Japan keeps intervention threat firmly on the table

 

Attention now shifts back to Japan, where authorities remain highly sensitive to renewed yen weakness. The USD/JPY experienced sharp downside moves before the US employment report was released yesterday, raising fresh speculation that officials may already have stepped into the market.

 

Whether or not that move was intervention, the risk remains elevated over the holiday period. Historically, Japanese policymakers have often preferred periods of thinner global liquidity when carrying out currency operations, as smaller transactions can generate a greater market impact. Previous intervention campaigns have also tended to unfold over several trading sessions rather than through a single decisive move. So, don’t be surprised if they move in again today.

 

Still, intervention alone is unlikely to deliver lasting yen strength – as we have repeatedly seen. Without a more convincing shift in the Bank of Japan’s policy stance, particularly through stronger guidance on future interest rate increases, history suggests any gains in the yen could prove temporary. The experience following the intervention episodes earlier this year serves as a reminder that official action can slow the move, but rarely changes the longer-term direction without support from monetary policy.

 

USD/JPY technical analysis

 

The Japanese authorities were presumably already intervening before the jobs data was released yesterday. The USD/JPY took a sharp tumble earlier in the day before stabilising, then resumed its decline following the disappointing jobs report.

 

 

The pair has since been testing key support in the 160.50 to 160.70 zone, which previously acted as resistance and could now turn into support. However, if USD/JPY breaks below this area, that could tip the balance in favour of the bears, especially if Japan intervenes again or if we see broader US dollar weakness driven by further soft economic data.

 

Meanwhile, resistance is now located between 161.50 and 161.95. This zone previously acted as resistance before price broke above it. However, the breakout failed to hold on the retest, turning it into resistance.

 

The 161.95 level also marked the July 2024 high, so the pair’s inability to hold above it could prove significant. That said, we’ll have to see whether the bullish trend can reassert itself later on today, or more likely, in the days ahead.

 

 

Looking ahead: ISM PMI and FOMC meeting minutes

 

ISM services PMI will be released on Monday, July 6. Fed Chair Kevin Warsh avoided offering any clues on the likely direction of interest rates this week, preferring instead to reinforce the Fed’s data-dependent approach. That leaves forward-looking indicators like ISM PMI in the spotlight.

 

The FOMC meeting minutes for the June meeting will be released on Wednesday, July 8. Particular attention is being paid to any comments from Fed’s new Chair Kevin Warsh. After his relatively hawkish tone at the June policy meeting that sent the dollar sharply higher, markets will want to know how firm he and his FOMC colleagues are on inflation – if such clues are offered from the meeting’s minutes. So far, he’s offered little further clues on policy direction, maintaining a data-dependent approach.

 

 

 

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R