Waiting for market momentum | 12 August 2024

USDJPY:

Former Bank of Japan (BoJ) board member Makoto Sakurai said the central bank will not be able to raise rates in 2024, and predicts a rate hike in March 2025, citing recent market turmoil and the low probability of a quick economic recovery. This comes on top of recent dovish remarks by Bank of Japan Deputy Governor Shin'ichi Uchida stating that the central bank will not raise rates when markets are volatile and undermines the Japanese Yen (JPY) exchange rate, providing some support to the USD/JPY pair.

In addition, the overall positive tone in equity markets is reducing the relative safe haven status of the JPY, which, along with the modest rise in the US dollar (USD), is helping to boost demand for the USD/JPY pair. Meanwhile, a summary of opinions from the Bank of Japan's July meeting, released last week, showed that some members see room for further rate hikes and policy normalization. Moreover, geopolitical risks are helping to limit deeper yen losses and curbing USD/JPY gains.

Israeli intelligence believes that Iran has decided to attack Israel directly and may do so within days in retaliation for the assassination of Hamas leader Ismail Haniyeh in Tehran in late July. In addition, U.S. Defense Secretary Lloyd Austin said in a telephone conversation with his Israeli counterpart Gallant that he has ordered an acceleration of the transit of the aircraft carrier strike group USS Abraham Lincoln to the Middle East and the guided missile submarine USS Georgia to the Central Command area.

This poses the risk of further escalating geopolitical tensions in the Middle East. In addition, rising bets on a larger interest rate cut by the Federal Reserve (Fed) in September are deterring dollar bulls from aggressive bets. This, in turn, is helping to keep the USD/JPY pair on hold amid relatively low liquidity amid a holiday in Japan and a lack of market-important economic data.

Traders also seem reluctant and may prefer to wait on the sidelines ahead of the release of US consumer inflation data this week before making new directional bets. The all-important CPI report will play a key role in the Fed's future policy decisions, which in turn should provide a meaningful boost to the USD and the USD/JPY pair.

Trading recommendation: Trade mainly with buy orders at the price level of 147.35. We consider sell orders at the price level of 146.80.

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