As the final week of July comes to a close the approaching summer period is leaving markets anything but quiet. Once again this week, we’ve seen a slew of key developments including the July FOMC, EU leaders agreeing further curbs on Russian gas and also the US entering a technical recession. In terms of specific trades, it seems the big move capturing FX traders’ attention into the end of the week is the sharp reversal lower in USDJPY, with the pair falling around 4%. So, let’s take a look at what caused the move and, as ever, if you caught it? Well done! And if you missed it? There’s always next week!
What Caused the Move?
There are two sides to the coin here, the first being the sell off in USD and the second being the rally in JPY. So, in terms of unpacking the correction lower in USD this week, the two key factors have been the more neutral tone from the Fed at the July FOMC an Thursday’s disappointing GDP miss, confirming a technical recession in the US.
Fed Sounds More Neutral at FOMC
On Wednesday, the Fed disappointed USD bulls by announcing a further .75% hike, underwhelming those looking for a larger 1% hike. Along with the rate hike the Fed was also seen being much less clear about its intentions going forward. The Fed acknowledged there had been a slowdown recently and said that, despite inflation still running above target, rates were now around the neutral level and so further rate hikes would be data dependant. The market broadly interpreted these comments as laying the groundwork for a slower pace of hiking going forward leading to some USD unwind.
US Enters Technical Recession
Following the FOMC on Wednesday, USD was then knocked further lower as advanced Q2 GDP came in well below forecasts on Thursday. At -0.9%, this marks the second straight month of quarterly declines, marking the start of a technical recession in the US. Thursday’s data added to bearish sentiment in USD with trader quickly repricing their Fed rate hike expectations over the remainder of the year. Along with Powell’s comments at the FOMC, traders now see less likelihood of further aggressive action from the Fed with market pricing now settling on a .5% hike in September.
JPY Rallies on Softer USD & Recession Concerns
The Japanese Yen has benefited nicely from this situation. Given the huge decline we’ve seen in the Yen versus the Dollar this year, driven by growing monetary policy divergence between the Fed and BOJ, news that Fed tightening might now be slowing has seen JPY shorts covering at a rapid pace. Additionally, news of a US recession along with fears of a global recession this year too, are driving safe-haven flows into JPY helping lift the currency also.
Technical Views
USDJPY
The reversal in USDJPY from the approach to 140 has seen the market breaking down through the bullish channel which has framed price action this year. Price has moved through several key levels on the way down, most recently the 134.39 level. With both MACD and RSI bearish, while below here the focus is on a test of the 131.50 level next.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.
With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.