Japanese Yen continues to depreciate despite intervention threat

• The Japanese Yen loses ground as the US Dollar remains stable amid improved Treasury yields.
• The JPY could limit its downside as traders expect intervention by authorities.
• BoJ data showed that authorities entered the FX market on consecutive trading days last Thursday and Friday.

The Japanese Yen (JPY) extends its losses for the third consecutive session on Wednesday. The USD/JPY pair has received support from a modest rebound in the US Dollar (USD), which is likely influenced by improved Treasury yields.

The US Dollar also received support from a hawkish speech from Federal Reserve (Fed) Board of Governors member Dr. Adriana Kugler on Tuesday. Dr. Kugler indicated that if upcoming data does not confirm that inflation is moving toward the 2% target, it may be appropriate to maintain current rates for a while longer.

Traders remain vigilant amid suspicions of intervention by Japanese authorities. Data released on Tuesday showed that the Bank of Japan (BoJ) entered the foreign exchange market on consecutive trading days last Thursday and Friday.

The current account balance data from the BoJ, released on Tuesday, indicates an anticipated liquidity drain of approximately ¥2.74 trillion ($17.3 billion) from the financial system on Wednesday due to various government sector transactions. This follows an earlier forecast of a ¥600 billion drain, according to Nikkei Asia.

Daily Digest Market Movers: Japanese Yen declines as US Dollar remains stable

• Japan’s Tankan Manufacturers Sentiment Index rose to 11.0 in July from 6.0 in June. This figure registered the first gain in four months and indicated a pickup in economic activity.
• The US Retail Sales for June stayed mostly in line with expectations. Retail Sales in the United States held steady at $704.3 billion in June, after a 0.3% gain (revised from 0.1%) in May, and are in line with market expectations.
• Fed Chair Jerome Powell mentioned on Monday that the three US inflation readings of this year "add somewhat to confidence" that inflation is on course to meet the Fed’s target sustainably, suggesting that a shift to interest rate cuts may not be far off.
• Fed Bank of San Francisco President Mary Daly stated that inflation is cooling down in a way that bolsters confidence that it’s on its way to 2%. However, Daly added that more information is needed before making a rate decision.
• US President Joe Biden on Monday addressed the nation from the White House, where he condemned all political violence and called for unity, according to CNBC. Biden further stated that “it’s time to cool it down” and noted not just the weekend attack on Trump but also the possibility of election-year violence on multiple fronts.
• According to Saxo Bank, the increasing probability of a Trump 2.0 presidency has been bolstering the US Dollar. Market participants anticipate that a second term for Trump could lead to aggressive fiscal policies and trade measures, thereby driving demand for the greenback.
• BBH FX strategists highlight that recent softness in US data poses challenges to their perspective that the backdrop of sustained inflation and strong growth in the US largely remains intact. They note increasing concern among Federal Reserve officials regarding weaknesses in the labor market.

Technical Analysis: USD/JPY hovers around 158.50

USD/JPY trades around 158.40 on Wednesday. The daily chart analysis shows that the pair lies below its 9-day Exponential Moving Average (EMA), suggesting downward momentum in the short term. This signals that it may be prudent to hold off on buying until the trend shows signs of reversal.

Additionally, the momentum indicator, the 14-day Relative Strength Index (RSI), is below the 50 level, indicating a bearish bias. However, a further increase in the RSI could weaken the bearish sentiment.

Immediate resistance is observed around the nine-day Exponential Moving Average (EMA) at 159.20, followed by the lower boundary of the ascending channel at 160.60. Returning to trade within the ascending channel would likely improve sentiment for the USD/JPY pair, with a potential target toward the upper boundary of the channel near 164.00.

On the downside, the USD/JPY pair could find key support around the psychological level of 158.00. A break below this level could exert pressure on the pair, navigating the region around June's low at 154.55.

USD/JPY: Daily Chart