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Yesterday, the 2-day uptrend on USD/JPY stopped. During the trading day, the pair hit the 3-week low. Why did the greenback collapse? How long will it stay in the red zone?
On Thursday night, the dollar index, which measures the greenback against six counterparts, edged 0.59% lower to 106.28, pushing the yen higher.
Yesterday, USD/JPY lost almost 1%, coming in at 135.105, unseen since July 6.
A sell-off of the dollar started right after the FOMC meeting. The regulator lifted the interest rate by another 0.75%, as expected.
Demand for the greenback decreased following Chair Powell’s statement. The policymaker hinted that the Fed might slow the pace of rate hikes.
He said that interest rates have reached a “neutral level,” meaning a potential slowdown in the pace of rate increases.
Powell stressed that the Fed is edging away from detailed forward guidance. So, the size of further rate hikes is likely to be determined directly at each meeting.
Powell turned out to be less hawkish than the market feared. In this light, government bond yields decreased.
The yield on 10-year government bonds fell by 4 basis points to 2.78%, while the 2-year Treasury yield dropped to 2.98% on Powell’s comments.
US yield curve inversion is still at its highest level since 2000. Experts see it as a signal of an impending economic downturn.Today, the US will see the release of data on Q2 GDP. Figures are forecast to fall to 0.5 from 1.6% in the previous period.If the results come in line with the forecast, it will indicate a technical recession in the US.
Potentially disappointing data from the US, which may affect the further pace of monetary tightening, provides support for USD/JPY bears.
Today, the yen is strengthening versus the dollar despite the latest comments from Bank of Japan Deputy Governor Masayoshi Amamiya.
On Thursday, the official said that the Japanese regulator should persist with its loose monetary policy due to an unsustainable economic recovery and the uncertainty surrounding wage growth.
In light of the dovish BoJ, USD/JPY is highly likely to extend the downtrend.
A wide gap between interest rates in the US and Japan will support the greenback. Therefore, the current fall in the dollar should be seen as a mere pullback.
In the short term, analysts expect USD/JPY to extend the uptrend from the mark of 135 to 140.
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