USD/JPY forecast: Yen grinds lower into intervention territory

The USD/JPY is nearing intervention territory as it climbs above 157.00. Are we going to see a re-test of 160.00? The US dollar has been strengthening again, following a surprise rise in US consumer confidence for May, strengthening bond yields, and ongoing Fed hawkishness. Our short-term USD/JPY forecast remains bullish amid the BoJ’s current policy stance, the USD/JPY strong bullish trend and the US dollar’s overall robustness.

Why is the US dollar pushing higher?

This renewed dollar strength has been driven in part by a surprise rise in US consumer confidence for May and the resulting increase in US bond yields, which found additional support from weak auctions of two- and five-year US Treasuries. The Fed’s ongoing hawkish tone has also been a supporting factor for the dollar. Minneapolis Fed President Neel Kashkari said policymakers haven’t entirely ruled out additional interest-rate hikes.

Such has been the strength of US dollar today that not even a higher-than-expected CPI report from Australia could help to provide lasting support for the AUD/USD pair. Here, CPI came in at 3.6% y/y, which has basically ended hopes for a Reserve Bank of Australia rate cut this year.

Bullish momentum in some currency pairs is also helped to keep the dollar index supported. As well as the USD/JPY slowly grinding above 157.00, you have the offshore USD/CNH nearing the highs of the year circa 7.28, which partly explains why the AUD/USD has turned lower despite a hotter inflation report from Australia. A potential rise to a new high for the year on the USD/CNH could negatively impact risk assets and benefit the dollar.

USD/JPY forecast: Yen heads into intervention territory

The US dollar continues to grind higher after the Dollar Index found support from around its 200-day moving average (104.40) on Tuesday following a two-day drop, helped along with rising bond yields.

Higher US yields tend to support the USD/JPY, which has again been the case. At north of 157.00 handle, the USD/JPY has now entered FX intervention zone, although the slow grind argues against such a move given that Japan has made it clear that it is more concerned with the speed of the yen's depreciation, rather than the specific level at which it trades. Therefore, we might not see any action until the USD/JPY potentially reaches 160.00. The faster it potentially gets there, the more likely we will see an intervention.

At the end of last month, we saw the USD/JPY plunge by 5 big figures after Japan's Ministry of Finance with the help of Bank of Japan evidently sold billions of dollars from its reserves. Then, the high was just above the 160.00 handle, too. 

USD/JPY forecast: Technical levels and factors to watch

Source: TradingView.com

The USD/JPY remains a strong bullish trend as indicated for example by price remaining comfortably above the 21-day exponential moving average. What's more, the USD/JPY has been making interim higher highs and higher lows ever since it fell from that 160.00 handle following the Bank of Japan's suspected intervention at end of April.

In terms of support levels to watch, the first one is seen at around 156.55 which was resistance before. Below that, 156.00 comes into focus where the 21-day exponential moving average comes into play. Then, it is the 155 handle, which is the last major key support which also ties in with the bullish trend line.

On the upside, there's not much resistance seen until 158.00, which was the high from 1st of May when the dollar-yen dropped evidently on the back of the second round and intervention from the Bank of Japan. Above this level, 160.00 come into focus, which is just below the April’s high of 160.21.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R