Yen Setting Up Bullish Reversal, Dollar Index Ready for 100 and Below

Japanese Yen exhibited an impressive rally last week and ended as the strongest performer. The move was spurred by Japan’s substantial wage growth, which shot JGB yield higher and countered the impact of rising benchmark yields in the US and Eurozone. In light of these developments, signs are pointing towards a potential bullish reversal for Yen that could transpire without government intervention.

Contrastingly, Dollar failed to impress, ending as the second worst performer after Canadian Dollar, despite the release of solid job data. Strong rally in 10-year yield seemingly did little to support the greenback. The resurgence of Yen and robustness of Euro have potentially laid the groundwork for Dollar Index to plunge below the 100 mark. Concurrently, Gold appears to be gearing up for another attempt at bullish reversal as pressure mounts on the greenback again.

Elsewhere in the currency markets, New Zealand Dollar ended as second strongest performer of the week, closely followed by British The Australian Dollar, however, found itself on the backfoot, ending as the third weakest. Swiss Franc and Euro presented mixed results, overshadowed by the solid performance from Sterling.

Yen ready for bullish reversal without need of intervention?

Yen’s impressive surge last week, despite a backdrop of rising global benchmark yields, might initially seem perplexing. However, a deeper examination of the details reveals a logical progression. Interestingly, it suggests that a bullish shift in Yen could be on the horizon, even without the need for governmental intervention.

Boosting performance of Yen were the latest wage growth statistics from Japan. Regular pay in May recorded a substantial 1.8% yoy increase, a feat not seen since 1995. Nominal wages also doubled expectations, rising by 2.5% yoy.

These figures suggest that effective wage negotiations are starting to make a significant impact on Japan’s economic data. This change aligns with the objectives of BoJ, which has long contended that a shift in the country’s deflationary mindset is critical, and persistent wage growth is a prerequisite to achieving 2% inflation target sustainably. Given the current trajectory, there are growing chance that inflation could rebound after a slump in the second half of this year, paving the way for BoJ to wind down its ultra-loose monetary policy.

Reflecting this sentiment, 10-year JGB yield witnessed a sharp rally , closing at 0.436. Whether it is poised to prolong its current rise towards 0.5% mark—BoJ’s cap on 10-year JGB yield—will be closely monitored, as traders may start speculating on another tweak in Yield Curve Control parameters.

Looking at USD/JPY, after Friday’s steep decline, a short-term top at 145.06 is confirmed. The pressing question is whether this signals the completion of the entire rise from 127.20, identified as the second leg of the pattern from 151.93 high.

Near-term focus is now set on 140.90 resistance-turned-support. Sustained break of this level will elevate the possibility of the pattern from 151.93 commencing its third leg, and bring deeper fall to test 137.90 resistance-turned-support next.

Dollar index ready to break through 100 after failing to jump on job data

Despite the release of robust job data, the dollar underperformed this week, ending as one of the weaker performers alongside Canadian. The rally following ADP report proved short-lived, as the greenback experienced a sell-off shortly after non-farm payroll release. NFP was indeed solid, with strong showing in both headline jobs and wage growth. However, the markets seemed to focus more on this being the lowest job growth figure since 2020.

Critically, the NFP data did little to bolster the case for two or more rate hikes by Fed this year, a scenario which the “strong majority” of FOMC participants were anticipating. As it stands, fed funds futures market is pricing in less than 50% chance of another rate hike after July. Simultaneously, predictions do not foresee a greater than 50% chance of the first rate cut until May next year.

10-year yield made significant progress last week by powering through 3.859 resistance, and hit as high as 4.094. The development adds much credence to the case that correction from 4.333 has completed at 3.253 already. And larger up trend is ready to resume. Immediate focus for TNX is now on 4.091 resistance. Sustained break there will bring retest of 4.333 high. Meanwhile, below break of 3.859 resistance turned support will delay the bullish case and risk extending sideway trading.

In the bigger picture, outlook is staying bullish with strong support from 55 W EMA. Firm break of 4.333 would resume whole up trend from 0.398 (2020 low). Next target would be 61.8% projection of 1.343 to 4.333 from 3.253 at 5.100.

However, the rally in 10-year yield did little to prop up Dollar Index. On the one hand, Germany 10-year yield has indeed surged too, and hit the highest level since March, providing a boost to Euro. On the other hand, as mentioned above, Yen and 10-year JGB yield also jumped.

As mentioned in previous reports, there appears to be little prospect for the Dollar Index breaking through 100.78/82 support zone if Euro and Yen do not rally together strongly. Now, the conditions for this appear to be emerging.

Technically, after last week’s steep decline, near-term outlook for DXY will remain bearish as long as 103.57 resistance holds. Break of the 101.92 support could a downside acceleration through 100.78 to resume the larger downtrend from 114.77 (2022 high).

Looking at the broader picture, strong support is still expected from the 61.8% retracement of 89.20 to 114.77 at 98.96 to contain the downside and bring a medium-term rebound. That could happen if BoJ refrain from adjusting its 0.50% cap on 10-year JGB yield, and thus limiting Yen’s rally. Another factor could be the spillover of manufacturing recession to services in Eurozone, which is starting to be reflected in PMIs, that reduce the need to extended tightening by ECB beyond July.

However, any significant adjustment in BoJ’s YCC and accompanied upside acceleration Yen could propel DXY through 98.6. In this case, Dollar Index might only be able to find a bottom after hitting 61.8% projection of 114.77 to 100.82 from 104.69 at 96.06.

Gold to have a second attempt on bullish reversal

As Dollar succumbs to selling pressure, Gold’s failed attempt at a bullish reversal last week could be set for a second wind. Should Gold decisively break 55D EMA (now at 1945.15), it would indicate completion of corrective decline from 2062.95 at 1892.76, just shy of 38.2% retracement of 1614.60 to 2062.95 at 1891.68.

If this bullish scenario materializes, further rally should be expected, potentially stretching up to 61.8% retracement at 1997.93. This implies the possibility of Gold surpassing psychological level of 2000, at least briefly.

The momentum needed for Gold to revisit its 2062.95 and 2074.78 record high will largely hinge on Dollar Index’s response to 98.60 fibonacci support mentioned above, after breaking 10078/82. Future movements in Dollar Index and Gold could therefore serve as a confirmation to each others’.

EUR/USD Weekly Outlook

EUR/USD continued to draw strong support from 55 D EMA (now at 1.0859) last week even though it is still bounded in range below 1.1011. Initial bias remains neutral this week first, but further rally is in favor. On the upside, break of 1.1011 will resume the rise from 1.0634 and target 1.1094 resistance. Decisive break there will resume larger up trend from 0.9534 to 1.1273 fibonacci level. However, firm break of 1.0834 will turn bias to the downside for 1.0634 support instead.

In the bigger picture, as long as 1.0515 support holds, rise from 0.9534 (2022 low) would still extend higher. Sustained break of 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 will solidify the case of bullish trend reversal and target 1.2348 resistance next (2021 high).

In the long term picture, focus stays on 55 M EMA (now at 1.1135). Rejection by this EMA will revive long term bearishness. However, sustained break above here will be affirm the case of long term bullish reversal and target 1.2348 resistance for confirmation.

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