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August 4, 2021

USD/JPY Deep Dive: Continued Channel?

Bart Kurek

Check out my previous USDJPY deep dive here to see how we have progressed...

We saw price travelling in an ascending channel since the start of the year, however at the start of July we did see price failing to create the next high in the channel, and instead starting forming new lower highs and lower lows. We're now seeing price move in this new descending channel, head back to test previous highs.

109.2 is a good horizontal level to watch out for, and how price reacts around this level. A clear break below this level indicated price to continue heading lower to make the next touch of the channel. If price is failing to break through this level then we may see more touches of the channel's top, and potentially a new trend.

Looking at retail sentiment, we got quite a mixed retail sentiment, there isn't a clear sided winner as to how most traders are currently trading U/J.

Over the next week, we've got a few news events coming out, an important one being NFP, where the US will be printing their latest employment numbers, likely to show a slight increase at 870k vs 850k. The unemployment rate is projected to also dip from 5.9% to 5.7%. Keep in mind that the Fed is keeping a close eye on the labour market, waiting for more evidence of a strong jobs recovery before adjusting policy.

Wednesday's headline ISM and business activity index both blitzed expectations, while new orders, employment, and prices paid all gathered pace from the prior month to mark further if not yet the 'substantial' progress towards policy targets needed to start tapering. However, Clarida expects conditions for hikes to be met by the end of 2022, assuming inflation and jobs develop in line with his projections.

Some short-term considerations for the Dollar could cause some challenges for the mid-term downside bias. Right now, economists are expecting the US to average between 5.0% & 7.0% annualized GDP in 2021, which would be the most substantial rebound since 1984. At the same time, growth forecasts for the EU and China have been lowered, which means the relative growth differentials should be more supportive of the USD.

The additional boost in savings and additional fiscal support means the odds of upside surprises in US growth and inflation have grown. Thus, even though financial conditions, vaccine developments and relative growth and inflation bode well for some Dollar upside, the market’s main focus right now is on the Fed’s policy normalization path.

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