Japanese Yen gathers strength as BoJ hike bets ramp up

The USD/JPY pair loses momentum to around 153.55 during the early Asian session on Wednesday. The Japanese Yen (JPY) strengthens against the US Dollar (USD) as Bank of Japan (BoJ) policymakers opened the door for a rate hike in September. Traders will closely monitor the key US inflation data, which will be published later this week. 

The BoJ is expected to raise its policy rate to 1.25% from the current 1.0% at its September policy meeting, signaling an acceleration in the pace of rate hikes. The move would raise the interest rate to its highest level in about 31 years and follow a rate hike in June, as the Japanese central bank seeks to address the risk of prices rising more than expected amid higher crude oil prices and a weak JPY. 

BoJ board member Hajime Takata said last week that the central bank could take a more aggressive approach than expected. He said a 25-basis-point hike “is not necessarily set in stone,” and that generally speaking, back-to-back rate hikes would be a possibility, too.

The US Producer Price Index (PPI) and Consumer Price Index (CPI) inflation data will take center stage later this week. These readings may shed fresh light on the Federal Reserve’s (Fed) next steps at the September meeting. In case of hotter-than-expected inflation outcomes, this could boost the Greenback against the JPY in the near term. 

Traders are now pricing in about a 60% chance of an interest rate hike at the US central bank’s policy meeting, according to the CME FedWatch Tool. 

USD/JPY downside bias builds as UOB flags year-to-date low as next key support

Analysts at UOB Group note that the recent slide in USD/JPY has materially shifted their medium-term bias. They recall that as of Friday, 04 Sep, when spot was trading around 155.90, they had highlighted that “conditions are deeply oversold” after the sharp drop the previous Thursday and that USD “must close below 155.00 before further declines are likely,” with “the next level to watch below 155.00” identified at “154.20.”

However, UOB points out that “yesterday, in an unexpectedly sharp move, USD broke below 155.00 and plunged to a low of 154.04.” This price action, they argue, “suggests USD is likely to continue to weaken,” with “the next support level to watch” now the “year-to-date low of 152.08.” According to the bank, “the downside pressure will remain intact as long as USD holds below 156.00,” which they now describe as a “strong resistance” level, revised down from 157.50 previously.

Technical Analysis: USD/JPY keeps a bearish vibe amid oversold RSI

In the daily chart, USD/JPY extends a bearish phase with price now below the entire 20-day Bollinger envelope and well under the 100-day Simple Moving Average (SMA). The slide beneath the lower Bollinger Band underscores strong downside pressure, while the Relative Strength Index (14) at 25 signals oversold conditions that could slow, but not yet reverse, the decline.

On the topside, initial resistance is located at the breached lower Bollinger Band around 154.05, followed by the 20-day Bollinger middle band near 158.20, where recovery attempts would likely meet renewed selling. Above that, the 100-day SMA at 159.80 and the upper Bollinger Band near 162.32 compose a broader resistance zone that would need to be reclaimed to ease the current bearish bias.