DailyFX.com - USDJPY Rallies to Multi-Week Highs, but What Could Force it Higher?

Fundamental Forecast for Yen:Neutral

  • Sentiment extremes suggest that the Japanese Yen may lose versus Euro
  • These are the critical levels to watch for the USDJPY exchange rate

The Japanese Yen remains in a miniscule trading range versus the US Dollar, but a jump in volatility suggests some predict key events ahead could finally force some sharper USD/JPY moves.

What keeps the Japanese Yen from much larger price swings? Record-low interest rates across the globe almost certainly play a part; yield-sensitive traders see little reason to buy or sell given expectations that global central banks will keep rates near record-lows.

We’ll watch a potentially significant US Federal Reserve interest rate decision and US Nonfarm Payrolls report for USDJPY volatility.

The US Fed will almost certainly stick to the script and continue its “Taper” of Quantitative Easing policies, but the devil is always in the details. Traders drove the Dollar to fresh multi-week highs versus the Yen—perhaps an indication of positive expectations ahead of the FOMC meeting.

It’s important to note we saw similar price action into the June monetary policy announcement; an initial Dollar surge proved short-lived, and the USDJPY has yet to break above the highs established following the June meeting.

The monthly US Nonfarm Payrolls report provides the other important bit of economic event risk for the Dollar/Yen. Economists predict that the US added over 200k jobs in the month of July for the sixth-consecutive month, and lofty expectations leave ample room for disappointment. It would likely take a substantially above-forecast print to force a major Dollar rally, while a disappointment could kill the momentum of positive data for the Greenback.

Will the week ahead finally force the USDJPY out of its narrow range? The odds are admittedly low, but a slow build in FX volatility prices suggests some are betting on/hedging against larger moves. Until we see a break of much more significant resistance of ¥103 or support near ¥100.80, however, we expect USDJPY volatility to trade back towards record lows. - DR

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