USD/JPY stalling below fresh highs in Tokyo's opening hour of trade

USD/JPY was extending its recent rally in early Asia, with 108.96 for a six-week high but is stalling in the opening hour of Tokyo's trading. The Dollar is strong leading into Powell's testimony in the New York session today following Philadelphia Fed president Harker (voter in 2020) reported by the WSJ that he doesn’t see a compelling reason to cut interest rates given the strength of the economy and that he projected no change in rates this year.

The US 2-year treasury yields climbed from 1.87% to 1.91% while the 10-year yields rose from 2.03% to 2.07% and markets are now pricing less easing for the July meeting, now at 27bp. Yields rallied after the strong growth in Nonfarm Payrolls in June but money markets are still fully priced for a 25bp cut in the federal funds rate at the end-July FOMC meeting.

All eyes will not turn to Powell's semi-annual testimony to Congress at 10 am NY time (midnight Syd) and the FOMC minutes that follow. After a prepared statement, he will answer questions from members of the House Committee on Financial Services. "If the Fed is not inclined to act so soon, then this is the time for Powell to shift market expectations. Westpac recently changed its call from 2 Fed cuts in Sep and Dec to 2 cuts in Jul and Oct/Dec," analysts at Westpac explained.

Trade tensions rising between Japan and Korea

Meanwhile, while the global markets have focused on the trade war between the US and China, trade tensions have also been rising between Japan and Korea. Analysts at ANZ Bank explained that Japan is restricting the trade of tech goods to South Korea, and tit-for-tat response is expected.

"Japan has removed South Korea from its ‘white list’ of countries which it deems to have trustworthy export controls. Tensions between the Japanese Prime Minister Shinzo Abe and the South Korean President Moon Jae-in increased after last month’s G20 summit and look set to intensify further. Both leaders won’t want to lose face ahead of upcoming elections, but they may find they are pressured by their people to quietly resolve their differences due to the potential impact of the trade tensions on their economies.

The intensity of the trade war between US and China may have eased recently but there is still no guarantee that either side has the will to resolve their differences when talks resume this week. China’s private sector has taken a hit but the government appears to be doing its bit to keep the economy afloat."

USD/JPY levels

Valeria Bednarik, the Chief Analyst at FXStreet, explained that the USD/JPY pair was unable to extend its gains beyond 109.00, in part due to growing fears about a global economic downturn, and partially because speculative interest paused dollar’s buying ahead of Powell’s testimony. Nevertheless, the short-term technical picture continues favoring the upside, as, in the 4 hours chart, technical indicators have barely retreated from overbought levels, while the pair remains above all of its moving averages, and with the 20 SMA now crossing above the 200 SMA, both providing a dynamic support around 108.35.