Bearish USD/JPY Behavior Takes Shape Ahead Of U.S. GDP, FOMC Meeting

JAPANESE YEN TALKING POINTS

USD/JPY remains under pressure as U.S. President Donald Trump tweets that ‘tariffs are the greatest,’ and the exchange rate may exhibit a more bearish behavior ahead of the next Federal Open Market Committee (FOMC) interest rate decision on August 1 as the central bank is widely expected to keep the benchmark interest rate on hold.

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BEARISH USD/JPY BEHAVIOR TAKES SHAPE AHEAD OF U.S. GDP, FOMC MEETING 

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Recent remarks from the U.S. president has swayed the near-term outlook for USD/JPY as the leader warns that a strong dollar is ‘taking away’ the competitive advantage of the U.S. economy,’ and a comments surrounding the conduct of monetary policy may continue to impact the exchange rate as it undermines the independence of the Federal Reserve. 

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In response, the FOMC may continue to prepare U.S. households and businesses for higher borrowing-costs as Fed Fund Futures continue to price a greater than 80% probability for a move in September, and fresh data prints coming out of the economy may keep the central bank on course to implement four rate-hikes this year as the 2Q Gross Domestic Product (GDP) report is anticipated to show the growth rate expanding 4.2% per annum, which would mark the highest reading since 2014. 

Signs of a more robust economy may encourage Chairman Jerome Powell & Co. to retain a hawkish outlook as the committee largely achieves its dual mandate for full-employment and price stability, and comments pointing to an imminent rate-hike may curb the recent pullback in USD/JPY as the Bank of Japan (BoJ) remains in no rush to abandon its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.

In turn, the FOMC’s may strike a similar tone to the semi-annual Humphrey-Hawkins testimony, but recent price action in USD/JPY warns of a larger pullback ahead of the Fed meeting as the advance from earlier this year unravels, with the Relative Strength Index (RSI) highlighting a similar dynamic.

USD/JPY DAILY CHART

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• There appears to be a shift in USD/JPY behavior as both price and the RSI snap the upward trends from earlier this year, and the exchange rate may exhibit a more bearish behavior over the coming days as it extends the series of lower highs carried over from the previous week.
• In turn, the outlook for USD/JPY no longer remains constructive, with a close below the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) region raising the risk for a move back towards the monthly-low (110.28) followed by the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion).