07.08.202410:37 Forex Analysis & Reviews: JPY again slumps against USD

This morning, the yen again slumped from 144 to 148 against the US dollar, following comments from the Bank of Japan that highlighted discomfort caused by ongoing market instability, which stalled further strengthening of the yen. The yen dropped after Deputy Governor Shinichi Uchida delivered a strong dovish message in response to recent volatility in global markets.

Remarkably, the yen has already advanced by nearly 10% this quarter, convincing traders to cut down on carry trade positions and putting pressure on Japanese stocks and bonds. Uchida's comments were the first public statements from a Bank of Japan board member since the central bank raised interest rates on July 31. The rate hike fueled the already significant rise of the yen against the US dollar.

Currently, Uchida's comments may bring some stability to the Japanese stock market, but they cannot shift focus away from the economic data from the United States and recession fears, which have also been a powerful catalyst for the recent stock market plunge and the strengthening of the yen. The question of opening new carry trade positions remains open, as high volatility and worries about the US economy now entail greater risks for such trades.

The yen is expected to stabilize within the range of around 145-148, but the risk-reward ratio remains tilted towards further strengthening of the yen and a decline in the USD/JPY pair. We should not forget that the Federal Reserve plans to embark on monetary easing. The prospects of a rate cut in the US could trigger another dollar sell-off and yen rise.

Besides the Bank of Japan, the government is also shocked by market turbulence, now clearly understanding that last week's hawkish turn by the Bank of Japan will have much more negative consequences for Japan, especially if the US slips into a significant economic downturn. The excessive rise of the yen also arouses policymakers' concerns about the future of Japan's economy. Indeed, even the latest data on wage growth, which is positive for consumer spending, have not been able to soothe the yen volatility.

Regarding other statements by Uchida, he indirectly acknowledged that it would be difficult for the Bank of Japan to continue raising interest rates. For now, only December of this year is considered a realistic scenario for an increase in borrowing costs.

Technical picture of USD/JPY

For USD buyers, the nearest resistance level to conquer is 146.80. Only this will allow targeting 147.20. It will be quite difficult to break above this level. The furthest target will be the 147.50 area, after which a sharper rise to 147.90 will be in the cards. In case of a decline in USD/JPY, the bears will attempt to take control of 146.50. If they succeed, breaking this range will deal a serious blow to the bulls' positions and push USD/JPY to a low of 146.22, with the prospect of dropping to 145.90.