Dovish BoJ to see USDJPY gain to 141

A sea of green across regional equity markets to start the new week as better than expected U.S corporate earnings and economic data released on Friday eased concerns over slowdown risks.

Risk sentiment has also been aided by a surprise fall in U.S consumer long-term inflation expectations on Friday night. A fall that supported dovish to market expectations Fed speak that has promoted the idea of a 75bp rate hike, ahead of a heavy-handed 100bp Fed rate hike next week.

However after USDJPY punched above 139 last week for the first time since September 1998, the subsequent easing in interest rate hike expectations for the July meeting has undercut some support for USDJPY as well as the broader U.S dollar complex.

In the lead-up to Thursdays BOJ meeting, market expectations for BOJ policy normalization have softened. The only hawkish shift that the BOJ is expected to make is to upgrade its inflation outlook. Elsewhere, there have been few comments from Japanese authorities on recent JPY weakness, which suggests intervention is unlikely.

As such, supported by the ongoing central bank divergence of a hawkish Fed and a dovish BoJ, we view the current pullback in USDJPY as a correction and favour using any further weakness into the 137.50/20 support zone to re-open longs in USDJPY.

The stop loss would be placed at 135.50, looking for the rally to extend towards 141.00 in the coming months.

Source Tradingview. The figures stated are as of July 18^th 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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