Dollar-yen reacts to inflation but ongoing losses questionable

The dollar’s losses against the yen come as a result of lower American inflation and increasing expectations that the Bank of Japan (‘the BoJ’) might start to be more aggressive in normalising policy and generally trying to support the yen. The performance of the Japanese economy in recent years based on GDP has been weak and the extended divergence in policy between the BoJ and all other major central banks has fuelled the carry trade and weakened sentiment on the yen.

¥158.30 is an important area: this was the closing high in late April and is only slightly above the 61.8% weekly Fibonacci extension. A move clearly below there is questionable unless there’s an intervention by the BoJ or Japanese government or if participants become more certain that the former will hike again on 31 July. A retest of recent highs around ¥162 before the trend retraces significantly or even possibly reverses might be more likely.

There’s no longer any overbought signal on the daily chart and ATR has risen after the drop on 11 July. This kind of shakeout can attract new joiners to a strong trend because it offers a seemingly clear opportunity to enter at a better price. The situation here is complicated though by the possibility of an intervention at any time making the current technical picture redundant.

This is my personal opinion which does not represent the opinion of Exness. This is not a recommendation to trade.