Japanese Yen Reversal To Take Shape Amid Deviation In Policy Outlook

Fundamental Forecast for Japanese Yen: Bearish

• USDJPY Resistance Expected at 7880
• USDJPY: Interim Support Found Near 78.00
• Japanese Yen Sentiment Warns of Turn

The Japanese Yen weakened against its U.S. counterpart amid the stronger-than-expected GDP report coming out of the world's largest economy, and the USDJPY may continue to retrace the selloff from earlier this month as the Federal Reserve moves away from its easing cycle. Although the FOMC is widely expected to maintain its current policy in August, the fresh batch of central bank rhetoric could be the game-changer for the dollar-yen should the committee continue to talk down speculation for another round of quantitative easing.

As the advance 2Q GDP report for the U.S. raises the outlook for growth and inflation, the Fed should continue to soften its dovish tone for monetary policy, and the central bank may endorse a wait-and-see approach throughout the remainder of the year as policy makers see a muted risk for a double-dip recession. In contrast, it seems as though the Bank of Japan will continue to embark on its easing cycle as new board member Takahide Kiuchi pledges to look at new forms of monetary support, and the greater deviation in the policy outlook may spur a bullish move in the USDJPY as the Fed remains better positioned to normalize monetary policy ahead of the BoJ. Beyond the interest rate decision, the highly anticipated U.S. Non-Farm Payrolls report is expected to show employment increasing another 100K in July following the 80K expansion the month prior, and the faster rate of job growth may ultimately produce a meaningful move to the upside for the USDJPY as it dampens expectations for QE3.

Although we're still watching the downward trending channel in the USDJPY, the bearish momentum appears to be tapering off as the relative strength index rebounds ahead of oversold territory. As a result, the dollar-yen could be putting in a short-term bottom as we head into the final days of July, and the pair looks primed for a bullish breakout as the Fed prepares to switch gears. - DS