- A combination of factors prompts aggressive long-unwinding trade around USD/JPY on Friday.
- Japanese intervention speculations boosts the JPY and exerts pressure amid a further USD slide.
- The Fed-BoJ policy divergence should act as a tailwind for the major and limit deeper losses.
The USD/JPY pair comes under heavy selling on the last day of the week and retreats further from its highest level since August 1998, around the 145.00 mark touched on Wednesday. The pair maintains its offered tone through the early European session and is currently placed near mid-142.00s or a three-day low.
Speculations that authorities may soon step in to arrest the freefall in the Japanese yen turn out to be a key factor that prompts aggressive long-unwinding around the USD/JPY pair. This, along with the ongoing US dollar profit-taking slide from a two-decade high, further contributes to the sharp intraday decline. The USD downfall, however, seems cushioned amid firming expectations that the Fed will continue to tighten its policy at a faster pace to tame inflation.
In fact, the implied odds for a 75 bps Fed rate hike move in September now stands at 85%. The bets were reaffirmed by the overnight hawkish remarks by Fed Chair Jerome Powell, reiterating the central bank's strong commitment to bringing inflation down. This remains supportive of elevated US Treasury bond yields. The resultant widening of the US-Japan rate differential, along with a positive risk tone, could undermine the safe-haven JPY and lend support to the USD/JPY pair.
Furthermore, the Bank of Japan has been lagging behind other major central banks in the process of policy normalisation and remains committed to continuing with its monetary easing. This, in turn, suggests that the worst is still not over for the Japanese yen and the path of least resistance for the USD/JPY is to the upside. Hence, any subsequent corrective decline might still be seen as a buying opportunity and is more likely to remain limited, at least for the time being.
There isn't any major market-moving economic data due for release from the US, leaving the buck at the mercy of speeches by Fed officials. Apart from this, the US bond yields could influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader risk sentiment to grab short-term opportunities around the major.
Technical levels to watch
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