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USDJPY sideways, but can it break back above 111.00?

The USDJPY has risen 3.89% in the last year, but so far for July, it is down -0.48%. The strength in the US dollar is evident in the DXY but the risks around the Delta Variant are keeping the yen supported around the 109-110 levels. The Olympics are currently running in Japan but with Tokyo, in lockdown, the outlook for Japanese macroeconomics is looking dire. The start of this week should be quiet for the USDJPY as we await some important Tier 1 US data starting on Wednesday with the FOMC meeting.

USDJPY Forex Analysis

The 1-day outlook for USDJPY is sideways as traders wait for the FOMC on Wednesday, GDP data from the USA on Thursday, and then the inflation data on Friday.

Last week ended well for the USDJPY, having seen it dip down to the support area of 109.00-109.20, but the slight risk-off tone to the start of this week has seen a move into the yen today and out of the risk-sensitive commodity pairs and equities.

The Swiss franc is not stronger against a few pairs including the pound so it’s not an entirely risk-off move into the yen.

Support for USJPY comes in around 110.00 109.96 and this needs to hold to keep the

immediate price action moving higher. A clear line in the sand for the bears would be the weekly 20-period exponential moving average. But for now, USDJPY continues to move higher towards June’s 110.70-111.65, swing high.

The daily Ichimoku cloud is also a good gauge of whether price action is breaking down, as, since the break higher at the start of 2021, this indicator has been showing where good support structures reside.

The ActivTrades sentiment indicator is showing a fairly balanced sentiment between the bulls and the bears so it would be hard to fade a move either way currently.

The RSI is reflecting the sentiment indicator as is the MACD with both oscillators pointing to a flat market. However, the Stochastic oscillator set to 10,3,3 has been in the overbought zone several times on the daily time frame, so a cross below the mid-point could be the first time it indicates a bear move in the last 12 months. Until then I am going to assume that readings above 70 are a continuation of the bull move rather than an extreme overbought reading.

Fundamentally a lot would change on Wednesday if the FOMC is more definitely Hawkish. Words around rate rises, tapering of assets would see the US dollar jump. This is unlikely though, as the current consensus is that they are just going a bit less Dovish.

With the Fed purchasing $120bn worth of US Treasuries and MBS per month, market analysts are concluding that we’re nearing the end of that policy as they don’t see it having much more room to run. The US Treasury is reducing the issuance of debt and the US Congress will have to decide soon on whether to suspend, reduce, or increase the debt ceiling this month, or risk defaulting on payments to the Federal employees and services.

In recent commentary Chair Powell stated that achieving “substantial further progress” and achieving the goals on inflation and employment required to start tapering, was still “a ways off”. It would be difficult to drop that now given that comment was made after the blow of NFP and high CPI data. Jackson Hole in August and the FOMC in September could be the key events to set up the start of QE tapering either at the September meeting or the meeting in early November.

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