The increase in the overnight rate to 1% had no effect on USD/JPY quotes. The pair is trading near the 160 level, and the need for currency interventions is rapidly diminishing. The reason is the end of the conflict in the Middle East. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan raised its overnight rate to 1%.
- Net short positions on the yen are at their highest level since 2017.
- The drop in oil prices is weighing on the US dollar.
- Short trades on the USD/JPY pair can be opened if the price slides below 159.9.
Weekly Fundamental Forecast for Yen
With no clear signals, the yen has no grounds for strengthening. The Bank of Japan wanted to let others do the hard work for it. The regulator had hoped that the end of the conflict in the Middle East would weaken the US dollar and push USDJPY quotes away from the psychologically important 160 level, around which the pair has been hovering since early June. The overnight rate was raised to 1%, the highest level since 1995. However, this proved insufficient to support the yen.
Investors had hoped to receive signals, if not of a continuation of the monetary tightening cycle, then at least that the risks of accelerating inflation for the Bank of Japan are higher than the risks of slowing economic growth. However, following the Board of Governors’ meeting, markets were left with the impression that the BoJ would continue raising the overnight rate once every six months. This means that by 2026, it could rise to a maximum of 1.25%. This is significantly lower than in other countries, suggesting the USDJPY rally remains on solid footing.
Central Bank Interest Rates
Source: Bloomberg.
Will the US-Iran deal trigger a massive sell-off of the US dollar? Only time will tell. Uncertainty surrounding the terms of the agreement is keeping demand for safe-haven assets high. That said, falling oil prices and a rally in stock indices are benefiting USD/JPY bears.
Oil Price and Japanese Yen Rate
Source: Bloomberg.
The backdrop to the resumption of currency interventions is hardly unfavorable. This is especially true given that hedge funds have held the largest net short positions on the yen since November 2017. Against this backdrop, even a relatively small-scale intervention by Tokyo in the Forex market could be enough to trigger stop-loss orders across the board and drive USD/JPY quotes lower.
Speculative Positions on Japanese Yen
Source: Bloomberg.
Nevertheless, the Japanese government is hesitating. It may be held back by its previous disastrous experience with currency interventions in late April and early May. Back then, the money was wasted. Perhaps the authorities are waiting for the right moment and counting on a weaker US dollar due to a decline in geopolitical risks. Whatever the case, the USD/JPY pair is moving sideways.
What could get it moving? The FOMC meeting could act as a trigger. Investors are bracing for a scenario in which the Fed, following the US administration’s stance, insists that the surge in inflation is temporary. If this happens, it would put an end to expectations of a rate hike in 2026 and deal a blow to the US dollar.
Weekly USDJPY Trading Plan
The end of the conflict in the Middle East makes Japan’s currency interventions irrelevant. Dovish signals from the Fed, including the FOMC’s unchanged interest rate forecasts, will provide an opportunity to sell the USD/JPY pair if it falls below 159.9.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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