USD/JPY Outlook: Bulls need to wait for sustained move beyond 140.00 level

The USD/JPY pair attracts some meaningful buying interest after the directionless price moves seen over the past two days and climbs to a fresh weekly high, closer to mid-139.00s during the first half of trading action on Wednesday. The overnight less-hawkish remarks by Bank of Japan (BoJ) Governor Kazuo Ueda, along with the prevalent risk-on environment, undermines the Japanese Yen (JPY) and provide a modest lift to the major. Speaking at a news conference after the G20 meeting in India on Tuesday, Ueda pushed back against speculations of a BoJ policy shift and signalled to maintain ultra-loose monetary policy for the time being. Ueda noted that there is still some distance to sustainably achieve the 2% inflation target. He further added that if the assumption is unchanged, the BoJ's overall narrative on monetary policy will remain unchanged. Hence, the focus will remain glued to the Japanese National Core CPI print, due Friday.

In the meantime, hopes for more stimulus measures from China overshadow the worsening economic outlook and continue to boost investors' sentiment. The National Development and Reform Commission (NDRC) – China's top economic planner – pledged that it would roll out policies to restore and expand consumption without delay as consumers' purchasing power remained weak. This remains  supportive of the underlying bullish sentiment surrounding the global equity markets and is seen denting demand for traditional safe-haven assets, including the JPY. The US Dollar (USD), on the other hand, ticks higher and moves further away from its lowest level since April 2022 touched on Tuesday. This is seen as another factor acting as a tailwind for the USD/JPY pair, though firming expectations that the Federal Reserve (Fed) is nearing the end of its current rate-hiking cycle might keep a lid on any meaningful appreciating move.

Investors seem convinced that the US central bank will raise rates one last time in late July before announcing a pause. The bets were reaffirmed by the downbeat US macro data on Tuesday, which showed that Retail Sales rose by a less-than-expected 0.3% in June. This leads to a further steep decline in the US Treasury bond yields, which might cap gains for the USD. Meanwhile, doubts over whether the Fed will commit to a more dovish policy stance or stick to its forecast for a 50 bps rate hike this year could further hold back traders from placing aggressive directional bets around the USD/JPY pair. This makes it prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom. Traders look to the US housing market data – Building Permits and Housing Starts – for some impetus during the early North American session. The broader risk sentiment should also produce short-term opportunities.

Technical Outlook

From a technical perspective, the recent recovery from the vicinity of a confluence comprising very important Simple Moving Averages (100-day and 200-day SMAs) has been along an upward-sloping channel. Against the backdrop of the recent sharp retracement slide from levels just above the 145.00 mark, or the year-to-date peak touched in June, this channel constitutes the formation of a bearish flag pattern. Furthermore, oscillators on the daily chart are holding deep in negative territory and validate the negative outlook for the USD/JPY pair.

Hence, any subsequent move up is more likely to confront stiff resistance near the top boundary of the trend channel, currently around the 139.80-139.85 region. This barrier coincides with the 200-hour SMA and the 140.00 psychological mark, which if cleared decisively will negate the bearish setup and prompt aggressive short-covering move. The USD/JPY pair might then accelerate the momentum towards the 140.45-140.50 intermediate hurdle en route to the 141.00 round figure and the 141.25-141.30 supply zone.

On the flip side, sustained weakness back below the 139.00 mark seems to attract some buyers near the 138.40-138.35 region ahead of the 138.00 mark, which coincides with the trend-channel support. Some follow-through selling below the weekly low, around the 137.70-137.65 region touched on Tuesday, will confirm the bearish flag breakdown and expose the 100-day/200-day SMAs confluence, near the 137.00 level. Spot prices might then turn vulnerable to prolonging the recent downward trajectory seen over the past two weeks.