Market Analysis: USD/JPY bullish challenge continues

USD/JPY is facing an important test of appetite as the US dollar attempts to a mean-reversal. The pair has been trying to build the momentum to break higher, but buyers have been encountering resistance, with lower highs seen I the last three sessions. That said, we’re not seeing a clear pattern of lower lows yet, suggesting the bias isn’t fully bearish in the short term. 

USD/JPY daily chart

_{Past performance is not a reliable indicator of future results.}

USD/JPY has become oversold in the past few weeks with the attempted reversal at the beginning of August being eagerly rejected. The fact that the pair had spent so much time being overextended on the topside with a clear dollar-dominance, has allowed the correction to deepen further than some may have anticipated, but questions as to how much further the pullback can go have started to arise.

As with the continued depreciation in the yen, Japanese officials have spoken up about their concern regarding the recent strengthening in the domestic currency, stating that it may lower profits for export industries and multinationals. The Bank of Japan will continue to closely monitor the developments in the currency markets which likely has investors feeling slightly cautious about being too bearish in USD/JPY, but BoJ Governor Ueda’s comments about potentially further hiking rates could see further downside in the coming weeks. This will likely be strengthened if the Federal Reserve continues to shift towards a more dovish stance. The split between 25 or 50 basis points of cuts at the September meeting is becoming more even, with the PCE data in focus of Friday, and the August jobs data at the end of next week. The closer the market becomes to pricing in a 50-basis point cut over the coming weeks, the more downside potential in USD/JPY.