The US Dollar is trading with minor gains against the Japanese Yen, on track to complete a three-day winning streak. The intra-day RSI has consolidated within bullish territory, which, together with the higher low posted last week, suggests a potential bottoming at the late May lows of 142.00. The Bank of Japan decided to keep its monetary policy unchanged but warned about increasing uncertainty in global trade, opting to avoid committing to new rate hikes.
The Yen picked up immediately after the decision but has since been losing ground. Investors remain cautious about placing large US Dollar bets ahead of Wednesday’s Federal Reserve decision. The Fed is highly likely to leave rates unchanged but might tone down its hawkish rhetoric in light of recent weak macroeconomic figures.
This outcome might cap the US Dollar’s recovery. The pair’s reversal from June 11 highs has been contained above the late-May lows at 142.15, and the pair is trending higher this week. The higher low hints at a potential trend shift.
Harmonic patterns suggest that the pair might be in the C-D leg of a Butterfly formation, heading to levels above the mentioned June 11 high at 145.35 and the May 29 high at 146.00. The 78.6% Fibonacci retracement of the late May sell-off, at 127.25, is a potential target for corrections. On the downside, immediate resistance is at the 144.45 intra-day level and the June 16 low at 143.65.
A break of 142.80 cancels this view. Several factors should theoretically support the yen. However, a deeper examination reveals underlying impediments, particularly the destabilizing effect of oil.
Unlike a classic risk-on, inflation-falls, rate-cut celebration, the current dovish tone from the Fed is reactive, driven by softening labor markets, rather than proactive. The market is not rewarding success; it’s bracing for the Fed’s forced submission, which spooks dollar bulls and raises uncertainty. Yet, even in this fragile economic landscape, the yen struggles to gain traction.
The crux of the problem lies in Japan’s near-total energy dependence. Every uptick in crude oil prices directly impacts yen strength by increasing import costs, which undermines its haven status in times of geopolitical stress. Last week’s developments highlight this issue.
Initially, the yen appreciated in response to Middle East tensions. However, as oil prices spiked, the dollar recovered, and the yen lost ground. This wasn’t a classical market shift to safe-haven currencies but rather a reflection of commodity hedging rewriting market rules.
yen struggles amid BoJ caution
Even the typically stable Swiss franc saw a dip, indicating a broader market skepticism toward traditional safe-havens in this environment. Looking ahead, the BoJ is expected to maintain its slow, cautious approach toward policy normalization.
Consequently, the yen’s performance will overwhelmingly depend on external forces — notably the actions of the Fed and geopolitical events. Should these forces align in favor of the yen and it still fails to rally, the market’s confidence in the currency will diminish drastically, leading to positioning unwinds. The timing is critical.
With summer approaching and expected low volatility, the yen’s window for a breakout is narrow. If conditions during this period cannot buoy the yen, it may be sidelined until fourth-quarter macroeconomic shifts offer new opportunities. The current scenario is less a test of market levels and more a test of faith, and presently, faith in the yen is waning.
As if the economic landscape weren’t complex enough, geopolitical risks are mounting. Tensions in the Middle East are escalating with a missile barrage from Iran near the U.S. Embassy in Tel Aviv serving as a stark reminder of the volatility. This incident has sparked concern over potential U.S. military responses, echoed by increased military logistics movements and heightened rhetoric from President Trump.
These developments indicate a possible strategic shift by the U.S., from deterrence to active engagement, which would have profound implications for global markets. Should military action ensue, it would trigger a full-scale market repricing across asset classes. FX traders would likely retreat from carry trades, gold could surge past previous highs, and crude oil might experience price jumps.
Market volatility would spike as investors react to the increased instability. Both the economic and geopolitical landscapes present unprecedented layers of complexity for the yen. Its ability to navigate these challenges will determine its trajectory in the coming months.
For now, traders and investors should brace for potential turbulence as these dynamics unfold. The Japanese yen held around 145.2 per dollar on Wednesday after falling for three straight sessions, as a series of disappointing economic indicators weighed on sentiment. Exports declined in May for the first time in eight months under the strain of US tariffs, while imports fell more than expected.
In addition, April’s core machinery orders slumped, and manufacturing sentiment deteriorated in June, highlighting mounting concerns over domestic demand. On the policy front, the Bank of Japan left interest rates unchanged on Tuesday and signaled a gradual approach to balance sheet reduction, reaffirming its cautious stance on stimulus withdrawal. Governor Kazuo Ueda reiterated that the BOJ is closely monitoring economic conditions and global trade dynamics, keeping the option open for future rate hikes if needed.
Adding to the pressure on the yen, reports emerged that Prime Minister Ishiba and President Donald Trump failed to reach a tariff agreement during the G7 summit in Canada.