• USD/JPY plunged on U.S.-China political tension
  • Enhanced employment benefit expires
  • More downside for USD/JPY

Last Wednesday, we spotted a triple bottom pattern in the making for USD/JPY in the H4 timeframe. Despite breaking above the key level of 107, USD/JPY eventually lost steam, bouncing off the neckline of the triple bottom formation, thus failing to play out amid the political tension between the U.S. and China.

China responded to the demand made by the U.S. to close the Chinese consulate in Houston with a tit for tat, ordering the U.S. to shut its consulate in Chengdu last Thursday. This action led to the decrease of risk appetite among market participants, pushing up the demand of safe haven currencies like the Japanese yen against other major currencies. USD/JPY took a hit during the day, plunging by more than 100pips before recovering no more than half of its losses, ending the week battered.

At the moment, the downside of USD/JPY is no doubt larger than its upside. Although USD/JPY is trading nowhere close to this year’s low back in early March when the Federal Reserve announced an emergency interest rate cut of 0.50% in response to the COVID-19 pandemic, we are interested in when this freefall will end. With July coming to an end, the only event that stands a chance to cause a reversal in USD/JPY will be the upcoming monetary policy meeting held by the Federal Reserve.

With the recent resurgence of COVID-19 cases in the U.S. and the expiry of the enhanced unemployment benefits, it is unlikely that the Federal Reserve Chairman Jerome Powell will deliver any optimism in his speech during the meeting. On the other hand, any hint of a possibility of negative rates may very well accelerate the freefall. With that, we do not see a recovery of USD/JPY in the near future. Instead, we are more inclined towards a further weakening of USD/JPY after the monetary policy meeting on 30 July at 0200 (SGT).

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By Gim Hong Lee

Gim Hong has been a full-time currency trader for more than 2.5 years, focusing on day and swing trading of major currencies and their crosses. He is a frequent contributor of currency and economic analysis in Forex Trading Asia. Graduated from Columbia University in the City of New York with a bachelor’s degree in applied mathematics and statistics, the nerdy side of Gim Hong enjoys learning about data analysis, machine learning and their applications in currency trading.

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