The Dollar/Yen posted a potentially bearish closing price reversal top last week after hitting its highest level since January 8. Sellers came in at 113.210, just slightly before a series of main tops at 113.381, 113.631 and 113.745.
The strength early in the week was fueled by hawkish testimony before a pair of congressional sub-committees by U.S. Federal Reserve Chairman Jerome Powell. The top was reached and a sharp break ensued after President Trump criticized the Fed’s monetary policy and threatened China with additional tariffs.
The Dollar/Yen rallied on July 17, driven by firmer U.S. Treasury yields and increased demand for risky assets. The catalysts behind the rally were the hawkish congressional testimony of U.S. Federal Reserve Chairman Jerome Powell and strong U.S. economic data.
U.S. Treasury yields rose slightly yesterday after Powell testified about the state of the economy and monetary policy before a congressional sub-committee. His comments helped widen the spread between U.S. Government bond yields and Japanese Government bond yields. This helped make the U.S. Dollar a more desirable investment.
During his semiannual monetary policy report to the Senate Banking Committee on Tuesday, Powell said the economy is strong enough to handle tighter monetary policy. He noted: “Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate.” Powell also said growth in the second quarter was “considerably stronger than in the first.”
On July 18, Fed Chairman Powell testified in front of the House Financial Services Committee, reiterating remarks he made to the Senate Banking Committee the previous day.
The consistency in Powell’s message was the highlight of his testimony. The price action in the Treasurys, equities and the dollar indicated that investors appreciate the Fed’s pretty consistent line of thinking regarding monetary policy. It also shows they want to see policy move in a predictable manner. Additionally, although Powell reiterated the Fed’s gradual approach to raising rates, investors appreciate that he left the door open for changes in case the economy slows down.
The Dollar/Yen topped and broke sharply after President Trump said he was not happy with the Fed raising interest rates. He also drove investors into the safe haven Yen on Friday when he threatened to put a tariff on every Chinese export to the United States.
There is economic data this week, but investor focus will be on Trump’s criticism of the Fed and a potential escalation of the trade dispute between the U.S. and China. Both comments weakened the U.S. Dollar.
Traders are also reacting to reports from Reuters and other media sources that the Bank of Japan is actively discussing changes to its policies. The BOJ is scheduled to hold its next monetary policy meeting on July 30 and July 31.
U.S. economic reports could also provide support for the dollar if they lead to higher rates. Key reports this week include Core Durable Goods and Advance GDP.
In Japan, minor reports include Flash Manufacturing PMI, Bank of Japan Consumer Inflation, the BOJ’s Services Producer Price Index (SSPI), and Tokyo Core Consumer Inflation.
The liquidation taking place in reaction to Trump’s comments about the strength of the U.S. Dollar is likely to drive the USD/JPY lower until traders find a balance point. The news about the BOJ considering changes in its policy should also keep a lid on any rallies.
Prices are not likely to rally unless Fed members come out strong against the President’s comments, or Trump backpedals from his criticism of the Fed and his call for a weaker U.S. Dollar.