The Japanese Yen (JPY) made a minor rebound against the US Dollar (USD) in Thursday’s trading session, paring back a portion of earlier losses. Despite the intraday recovery, the broader narrative remains unfavorable for the Yen. A combination of disappointing trade data, reduced expectations for Bank of Japan (BoJ) rate hikes, renewed USD strength, and global risk appetite continues to pressure the JPY.
Though the currency has shown momentary resilience, it is far from signaling a sustainable recovery in the short term. In their recent article, Fletrade delivers a step-by-step exploration of this complex issue.
Trade Balance Miss Amplifies JPY Weakness
Japan’s June trade surplus came in at ¥153.1 billion, significantly below the forecast of ¥353.9 billion and reflective of weakening export activity. This reading, while an improvement over May’s ¥638.6 billion deficit, underwhelmed markets.
Notably, exports declined for the second straight month, slipping 0.5% year-over-year, highlighting sluggish global demand, particularly from China, which remains Japan’s top trading partner. The data underscores the prolonged impact of US tariffs and points to external sector fragility.
Conversely, imports edged up 0.2% YoY, reversing May’s 7.7% plunge. The modest rebound signals a slight recovery in domestic demand, but it wasn’t enough to bolster confidence in Japan’s economic outlook. The trade data reinforces the market’s conviction that the BoJ will maintain its ultra-loose monetary policy for the remainder of the year, further diminishing the appeal of the Yen.
Diminishing BoJ Rate Hike Bets Weigh Heavily on JPY
Markets have largely abandoned hopes for a near-term BoJ rate hike, especially amid weak wage growth, slowing inflation, and heightened political risks ahead of the July 20 Upper House elections. Should the Liberal Democratic Party (LDP) and its coalition partner Komeito lose their majority, both fiscal and political uncertainties could rise, adding a layer of complexity to an already delicate policy normalization path.
Adding to these headwinds are concerns over declining real wages and signs that inflationary pressures in Japan are cooling, giving the BoJ little incentive to act aggressively. The central bank’s caution is further justified by geopolitical risks, including new US trade tariff threats, which could erode Japan’s export competitiveness.
USD Buoyed by Fed’s Cautious Optimism
While the JPY is bogged down by dovish domestic policy expectations, the USD continues to benefit from a relatively hawkish Federal Reserve stance. The US Dollar Index (DXY) is hovering near a multi-week high, bolstered by speculation that the Fed will delay rate cuts.
New York Fed President John Williams emphasized that the impact of recent tariffs is only beginning to filter through to the broader economy and stated that the current policy stance remains appropriate. Similarly, Dallas Fed President Lorie Logan reiterated that interest rates should stay elevated for longer to suppress inflation risks stemming from trade frictions.
Despite media speculation, the US President denied intentions to remove Fed Chair Jerome Powell, though he did renew criticism, urging Powell to lower rates. The resulting uncertainty around Fed independence has injected some volatility into the market, but has not materially changed the trajectory of USD strength for now.
Technical Outlook: USD/JPY Maintains Bullish Bias
Technically, the USD/JPY pair remains in a bullish configuration, bouncing off the 100-hour Simple Moving Average (SMA) and testing resistance levels near the 149.00 handle. Momentum indicators, including the Relative Strength Index (RSI), continue to hover in positive territory, suggesting that upside momentum could carry the pair towards the 149.15–149.20 range and possibly to the psychological 150.00 level, unseen since late March.
On the downside, initial support is seen at 148.00, followed by stronger demand near 147.70, aligning with the 100-hour SMA. A decisive breach below this region could trigger a deeper correction towards 146.60, 146.00, and the 100-day SMA around 145.80. Until such levels are tested, dips are likely to be viewed as buying opportunities by USD/JPY bulls.
Conclusion: Temporary JPY Relief Amid Larger Downtrend
While the Japanese Yen has staged a modest recovery against a broadly stronger US Dollar, the structural headwinds remain intact. The BoJ’s dovish tilt, disappointing trade data, weak inflation, and political uncertainty continue to weigh on the Yen. Meanwhile, the USD enjoys fundamental support from solid macroeconomic performance and a Fed in no rush to ease policy.
Unless there is a significant shift in Japanese monetary policy or a breakdown in US economic strength, the broader trend for USD/JPY remains bullish. As such, the recent dip in the pair appears to be more of a technical correction than a trend reversal. For now, Yen bears retain control, and any JPY strength is likely to be limited and short-lived.
