Based on the article titled “USD/JPY fails to test July high ahead of Fed rate decision” published by Matt Weller on FOREX.com, here is a rewritten and expanded version of the original content, presented in an informative format with a minimum of 1,000 words.
Title: USD/JPY Struggles to Revisit July High as Market Awaits Federal Reserve’s Interest Rate Decision
Author: Adapted from original article by Matt Weller, FOREX.com
The USD/JPY currency pair has shown signs of fading momentum after a recent rally driven largely by rising yields and a stronger U.S. dollar. Despite nearing its July high, the pair could not break through resistance levels, with traders shifting their focus to a crucial event: the Federal Reserve’s monetary policy decision.
This inflection point for the currency pair comes amid heightened expectations surrounding central bank actions, global inflation outlooks, and diverging economic performance between the United States and Japan. In this analysis, we explore the technical outlook, fundamental drivers shaping the current trend, and potential scenarios following the Fed’s announcement.
Market Context: USD/JPY and the Fed Decision
The USD/JPY has advanced significantly over recent weeks, supported by:
– A resilient U.S. economy, with recent economic indicators showing continued strength
– Rising U.S. Treasury yields, which have lifted the dollar
– A stark monetary policy divergence between the Federal Reserve and the Bank of Japan (BoJ)
Heading into this week’s Federal Open Market Committee (FOMC) meeting, traders are largely in agreement that the Fed will not raise interest rates in its September decision. However, attention has turned to the central bank’s policy statement, economic projections, and Chair Jerome Powell’s press conference for any signs of future policy direction.
Key Developments Driving the USD/JPY
Several factors have contributed to the pair’s recent price pattern:
1. Diverging Central Bank Policies
– The Federal Reserve has enacted an aggressive rate hiking cycle since 2022 to combat persistently high inflation.
– Markets are speculating whether the central bank will retain a hawkish stance or signal a pause or pivot in upcoming meetings.
– In contrast, the Bank of Japan has maintained ultra-loose monetary conditions, including negative interest rates and yield curve control (YCC), to support an economy struggling to generate consistent inflation. This has resulted in a considerable yield gap between U.S. and Japanese government bonds, boosting USD/JPY.
2. Rising Bond Yields
– U.S. Treasury yields surged in anticipation of longer-term elevated policy rates, driving up the dollar.
– The 10-year U.S. government bond yield recently hit levels last seen in 2007, signaling market apprehension about inflation persistence and the possibility of higher-for-longer rates.
– The Japanese government bond market, by comparison, remains heavily influenced by the BoJ’s cap on long-term yields, limiting the yen’s appeal.
3. Economic Data
– Reports on U.S. retail sales, industrial production, and consumer confidence have continued to outperform expectations, further reinforcing the dollar’s strength.
– Japanese data, meanwhile, has been more mixed, with inflation ticking higher but growth indicators remaining lackluster.
Technical Analysis: Resistance at July High
From a technical standpoint, USD/JPY attempted to retest its high from late July, situated near 145.00, but failed to gather enough bullish momentum.
Observations include:
– The pair peaked near 147.95 last week, a level just short of the July intraday high of 145.07.
– A bearish engulfing candle pattern formed on the daily chart last Friday, suggesting weakening bullish momentum and the potential for a short-term pullback.
– Subsequent price action has been consolidating in a narrow band between 146.00 and 147.75, with neither bulls nor bears gaining control.
– The Relative Strength Index (RSI) has begun showing divergence
Explore this further here: USD/JPY trading.