**USD/JPY Analysis: Dollar/Yen on Pace for Fifth Consecutive Daily Gain, Nears 38-Year Highs**
*Original author: Peter Stone, Mitrade.*
The USD/JPY currency pair has continued its formidable ascent, with the pair consolidating above 162.75 as of early September 5, 2024. The seemingly relentless strength of the US dollar against the Japanese yen is pushing the pair towards its highest level since the mid-1980s, with markets increasingly sensitive to verbal interventions from Japanese authorities. This extended rally reflects divergent economic and monetary policy fundamentals, as well as market speculation surrounding central bank actions.
**Key Developments Driving USD/JPY**
There are several crucial developments at play shaping the current movement in USD/JPY. These factors are interconnected and help explain why the pair remains so attractive to buyers despite rising warnings from the Japanese Ministry of Finance and the Bank of Japan.
– **Persistent US Dollar Strength**
– Ongoing strong macroeconomic data from the United States, with recent reports showing robust labor market conditions and an uptick in service sector activity.
– The ISM Services PMI for August hit 54.8, beating market expectations and reflecting expanding economic activity.
– US Treasury yields remain near cyclical peaks, especially the 2-year and 10-year notes, underlining elevated rate differentials in favor of the dollar.
– **Dovish Bank of Japan Policy**
– Despite some early hints of normalization, the Bank of Japan continues to maintain its ultra-loose monetary policy, with negative policy rates and ongoing yield curve control.
– Japanese inflation is still only gradually inching above target, with fundamental wage-driven pressures far from ingrained, dissuading policymakers from aggressive tightening.
– Governor Kazuo Ueda and other Board members have emphasized the need for patience, casting doubt over any imminent policy shifts that would boost the yen.
– **Heightened FX Intervention Risks**
– The Ministry of Finance has stepped up its verbal interventions, warning that excessive yen moves will draw official action.
– Speculation is mounting that a move beyond 163 could provoke direct market intervention, as seen previously in October 2022 and late 2023.
– However, past interventions had a short-lived effect, with markets ultimately reverting to the broader macro narrative.
**Market Sentiment and Technical Outlook**
Sentiment towards USD/JPY remains bullish, but risks are accumulating. The market is carefully watching for signs of fatigue or sudden policy action that could trigger a sharp reversal.
**Technical Analysis**
From a technical standpoint, USD/JPY is firmly in a long-term uptrend. Recent sessions have seen the pair carve out a string of higher highs and higher lows, with upward momentum prevailing.
– **Support and Resistance Levels**
– Immediate resistance is seen at 163.15, corresponding to the 38-year high from July 2024.
– Above this, few meaningful resistance levels exist, with the next psychological target likely at 165.00.
– Immediate support rests around 162.00, with further downside protection at the 50-period moving average near 161.25.
– **Momentum Indicators**
– The Relative Strength Index (RSI) on daily charts is approaching overbought territory, hinting at potential exhaustion.
– The MACD continues to print positive readings, confirming bullish momentum but leaving the pair vulnerable to a sudden pullback on intervention headlines.
– **Volume and Market Positioning**
– Trading volumes have accelerated in recent sessions, reflecting heightened interest and growing speculation regarding Japanese policy moves.
– Commitment of Traders (CFTC) data indicates that leveraged funds remain net long USD/JPY, though the long ratio is beginning to stretch.
**Fundamental Factors Supporting the Rally**
The underlying drivers of the USD/JPY rally can be distilled into several fundamental elements.
– **US Economic Outperformance**
– The US economy, despite a series of Federal Reserve
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