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Market News USD/JPY Recovers From 138.00/Nearly Two-Month Low, But Upside Potential Appears Constrained

USD/JPY Recovers From 138.00/Nearly Two-Month Low, But Upside Potential Appears Constrained

The USD/JPY attracts some purchasing on Thursday, halting its recent decline from the yearly high. A favourable risk sentiment weakens the JPY and induces short-covering in oversold markets. In anticipation of a shift in BoJ posture, a bearish USD could limit any meaningful recovery.

TOP1 Markets Analyst

2023-07-13

10305

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The USD/JPY pair stages a modest rebound from the 138.00 area, or a nearly two-month low reached during Thursday's Asian session, and reaches a new daily high in the last hour. Currently, spot prices trade in the region of 138.60, up less than 0.10% on the day, and appear to have halted the recent sharp retracement decline from the yearly peak reached on June 30.

The prevalent risk-on environment, exemplified by a protracted rally in equity markets, weakens the Japanese Yen (JPY). This, along with oversold conditions on hourly charts, prompts some intraday short-covering in the USD/JPY pair, especially after a precipitous decline of about 700 pips from levels just above the 145.00 psychological level over the past two weeks or so. Nonetheless, a substantial recovery remains elusive given the underlying bearish sentiment surrounding the US Dollar (USD).

In actuality, the USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near its lowest level since April 2022 as investors appear to be persuaded that the Federal Reserve (Fed) will only raise interest rates once more this year. Wednesday's US CPI report indicated that consumer prices moderated further in June, confirming the predictions. This leads to a further decline in US Treasury bond yields, which should continue to impact on the USD and cap any meaningful USD/JPY appreciation.

In addition, rumours that the Bank of Japan (BOJ) will revise its ultra-loose policy settings as early as this month could bolster the JPY and limit gains for the USD/JPY currency pair. Before confirming that spot prices have formed a near-term bottom, it would be prudent for bullish traders to await confirmation of strong follow-through purchasing. Traders are currently looking to the US economic calendar, which includes the Producer Price Index (PPI) and the Weekly Initial Jobless Claims, for opportunities in the near future.