USD/JPY outlook: Yen sliding to intervention territories

Yesterday saw safe-haven assets like the Japanese yen rally, benefitting from Putin's updated stance on Russia's nuclear arms doctrine after Ukraine fired US-supplied missiles into the nation for the first time. However, just as quickly as the situation escalated, the market’s panic was short-lived. The USD/JPY recovered to close the session flat, and similar price action unfolded in equity indices. Today, the USD/JPY finds itself well above the 155.00 handle again, as the US dollar rebounds across the board. Indeed, pairs such as the EUR/USD and GBP/USD were falling back, even though in the case of the cable we had some stronger-than-expected UK inflation data out this morning, which effectively ended any chances of another rate cut by the BoE this year. The focus for the USD/JPY is now turning to the potential for intervention from Japan. The USD/JPY is now inside the intervention zone between 155.00 to 160.00, where we saw a couple of manipulation efforts from Japanese authorities in the summer. Against this risk, the USD/JPY outlook is far from certain despite the ongoing strong bullish trend.

Markets shrug off Russia-Ukraine war escalation

The big news yesterday was that Ukraine fired US-supplied long range missiles into Russia for the first time. The news rattled stock markets and the USD/JPY initially, before quickly reversing. In the end, investors probably concluded that with Biden’s days numbered as US president, Russia may hold off from responding aggressively until Trump is appointed. Reports suggest that Putin is ready to discuss a ceasefire deal with Trump, although the former has a list of heavy demands including Ukraine abandoning its plan to join NATO.

Nevertheless, Kyiv is preparing a response from Russia, although despite Putin approving an updated nuclear doctrine, which broadens the conditions under which Russia might deploy nuclear weapons, an atomic attack is probably not on the cards at this stage. Use of atomic weapons is unthinkable, although we are getting close to very dangerous territories.

USD/JPY outlook: Yen intervention on the cards?

The yen’s continued slide has Japan’s government worried. Finance minister Kato said they will take appropriate action against excess forex moves, which they clearly believe has been the case with the USD/JPY going past the 156.00 level last week. It is not clear they have taken any action, but the verbal warning nonetheless applied pressure on all yen crosses earlier this week. With the yen weakening again, this time we could see some actual intervention – so be on the lookout for such a move.

US calendar is quiet today

On the US front, there’s not much in the way of key data, so all eyes are on Fed speakers today, with a mix of dovish and neutral voices. FOMC members Barr, Cook and Bowman are among the speakers. Following today’s rally in the US dollar, the second half of the session might see the greenback ease back against certain currencies amid profit-taking. We could be in for some range-bound price action until Friday’s release of global PMIs.

Technical USD/JPY outlook: key levels to watch

Source: TradingView.com

The bullish trend on the USD/JPY remains intact and this was again evidenced yesterday with rates bouncing strongly off the 21-day exponential moving average, and the subsequently follow-up buying pressure today. With rates back above the 154.80-155.00 pivotal area, this zone is now the most important short-term support to watch moving forward. In terms of resistance, 156.00 needs to be monitored now as approach it, followed by last week’s high of 156.75. There are not many other obvious resistance levels apart from round handles like 158.00 and 159.00, until we potentially get to 160.00.

If the abovementioned support zone between 154.80 and 155.00 fails to hold, then this could pave the way for a potential drop to 152.00, where is next big level, where we also have the 200-day average coming into play. This level I snow the line in the sand for – a closing break it would nullify the bullish technical USD/JPY outlook.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R