USD/JPY Slips Again — But Who Is Actually Intervening?

• Yen strength deepened as USD/JPY dropped sharply amid renewed FX intervention fears.
• Japan’s ambiguous stance keeps traders uneasy, while fundamentals still favor the dollar.
• Key support and resistance levels now define a tense technical setup ahead of FOMC risk.

The yen gained further momentum in early European trade with a quick +130-pip drop from around 154.50 to just below 153.20. There was no fresh news, and the move looked similar to Friday’s slip, suggesting there may well have been some intervention there. Traders have been on heightened alert for intervention in the FX market from Japanese authorities in recent days. While speculation has been rife about coordinated intervention by Japan and the US, there is no official confirmation of actual intervention yet. Nevertheless, markets are wary of such a move, although the fact the has eased far below the 160.00 level means there is now some breathing space for the pair before we see any big interventions, though it certainly has felt we might have seen a couple of smaller ones already. Whether intervention will work to keep the exchange rate depressed for long enough a period, is another question. The threat thereof is what is driving the yen higher for now. I see limited further downside in the pair without any fundamental changes and think FX intervention will have limited impact on the longer term USD/JPY direction.

FX Intervention Threats Weigh on USD/JPY

Japan’s Prime Minister Takaichi recently warned that authorities are prepared to act against speculative currency moves, amid concerns the yen weakens and domestic bond yields continue to climb. This comes after reports on Friday suggested that the New York Fed had conducted so-called “rate checks” on dollar yen, a move often interpreted as a precursor to official market action. There are a couple of reasons why the US may be more inclined to act as well as Japan. After all, the yen weakness has been amplifying the sell-off in Japanese government bonds, which has indirectly been pushing US Treasury yields higher too. A strong is also obviously not good for US exports of goods to Japan. But it doesn’t appear like they have actually intervened yet, so that remains a key risk for any long USD/JPY forecast, and leveraged positions. For now, authorities appear comfortable maintaining a deliberately ambiguous stance on intervention, keeping traders on edge.

Still, it is important to note that intervention alone might not be enough to cause a meaningful change in the USD/JPY trend, or to provide it with a strong fundamental backing. Real interest rates in Japan remain negative, and the snap election scheduled for 8 February could reintroduce pressure on JGBs and the yen.

Can the Dollar Bounce Back?

The US dollar index has been facing pressure against other currencies in recent times, in part because of geopolitical tensions. But the slump against the yen following reports of a “rate check” on Friday, which fuelled speculation that the US could be preparing for coordinated intervention with Japan, further pushed the dollar lower.

However, the dollar’s underlying fundamentals have not meaningfully deteriorated. Beyond the current geopolitical risk premium attached to US assets, the macro backdrop remains broadly supportive for the greenback, thanks to slight improvement in data. This week’s FOMC meeting could even lean mildly dollar-positive if the Fed Chair turns out to be more hawkish than expected. For the greenback to be punished significantly further from current levels will require some significant deterioration in data to put imminent firmly back on the table.

USD/JPY Technical Analysis

Following a sharp sell-off in recent days, the USD/JPY is looking a little overextended on the downside. So, a bit of a recovery shouldn’t come as a surprise, especially given the fact that the trend had been bullish before the rumours around intervention from the Japanese authorities started to swirl.

Therefore, I wouldn’t rule out the possibility of the USD/JPY snapping back and reclaim the broken support between the 154.50 and 155.00 area. If it does that, then we could well see renewed bullish momentum in the pair, especially if the Fed is perceived to be a little more on the hawkish side this week, or if the big tech earnings top estimates.

At the same time, the market is starting to ask real questions about the intervention from the Japanese authorities. So far, it looks like it’s only been verbal intervention. Therefore, the onus is on the Japanese authorities to provide actual substance and step in with real action.

A break back above 155.00 could potentially pave the way for a move towards 156.00, and then 157.50 is the next key resistance area to watch, which previously acted as support before the drop we saw on Friday.

On the downside, there isn’t much in terms of support until the next round handle of 153.00. Below that, we have the 152.00 handle, where the bullish trend line comes into play. And below that, the next key support level is around the 150.00 handle, where we also have the 200-day moving average converging.

**

Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

Read my articles at City Index