Japanese Yen Outlook: USD/JPY, GBP/JPY, EUR/JPY Price Setups

USD/JPY, GBP/JPY, EUR/JPY Price Setups

• USD/JPY: Japan’s fundamental economic shift coincides with a weaker dollar

• GBP/JPY: Sterling limits losses against the yen as hot wage data supports GBP

• EUR/JPY: Dark clouds form over Europe, cause for concern among ECB hawks

• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Yen Momentum Continues as Entrenched Deflationary Mindsets Appear to be Shifting

For decades, the Japanese economy has struggled to achieve even the slightest signs of demand driven inflation after the asset price bubble burst in the early nineties. Since then, consumers have been reserved in their spending due to the fact that wages have struggled to rise. Households expecting little to no upward revisions to their take home pay tend not to go out and spend more than they have previously, meaning that price makers have little to no room to raise prices without seeing a drastic decline in sales activity. This appears to be changing.

Earlier this year Japan recorded its fastest wage growth in 30 years and recent reports revealed that more and more of the labour market is participating in the rally with small and medium enterprises (SME) also seeing record gains. In the retail and services sector, Japan’s restaurants and hotels are seeing impressive demand despite prices rising in some cases between 24 and 50 percent. It may take longer for a multi-decade mindset to come around to anticipate salary increases and higher prices for goods and services – a precondition for the BoJ to normalize its ultra-loose monetary policy.

Japanese Retail Sales Trending Higher

Source: Refinitiv, prepared by Richard Snow

USD/JPY: Japan’s fundamental economic shift coincides with a weaker dollar

Encouraging fundamental data in Japan coincides with a recent dollar selloff after US payroll (NFP) figures disappointed on Friday – leaving the pair on track for its largest four-day decline since January. However, the USD/JPY chart had been hinting about a possible reversal after multiple daily candles congregated below the psychological level of 145 without showing further bullish impetus.

The selloff broke beneath 142.25 with relative ease, now into its fourth straight day of declines (assuming a close lower today), USD/JPY finds support at 138.29, with the 200 day simple moving average (SMA) around 137.17 currently. FX markets have shown increasing sensitivity to data meaning US inflation data tomorrow could exacerbate the bearish move if inflation prints lower – as it is expected to do via forecasts. A stickier core print could see a reprieve, seeing the pair edge towards 142.25 but the more likely scenario, given the speed of the selloff, is that prices find support rather than clawing back lost ground.

Keep an eye on the RSI which, at this rate, could find itself going from overbought to oversold in just a matter of days.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

GBP/JPY: Sterling limits losses against the yen as hot wage data supports GBP

Sterling has witnessed a modest decline against the yen on the back of a hawkish Bank of England and markets pricing in a terminal bank rate of just under 6.5%. Furthermore, today’s wage data revealed that over a three month period, UK average earnings (including bonuses) rose 6.9% vs a forecast of 6.8% and a prior print of 6.7%.

Immediate support for GBP/JPY comes in at 180.70 – a level witnessed all the way back in 2014. It appears the pair is respecting this level for now as the next level of support is all the way down at 174.85 and which would require capitulation in the UK currency. The RSI has recovered from an extended period in overbought territory. 180.70 is very much the line in the sand here and will need to be monitored for a potential bearish continuation.

With headwinds accruing in the UK (high, persistent inflation, excessive mortgage repayments and lack of productivity growth) chances of a move towards 188.80 appear slim but a retest of the recent high around 184.00 remains a possibility still.

GBP/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

EUR/JPY: Dark clouds form over Europe, cause for concern among ECB hawks

European fundamental data has revealed a weakening economic outlook. Germany, Europe’s largest economy and industrial hub leads the way to the downside as far as manufacturing PMI is concerned and remains within a technical recession. The ECB will no doubt be hoping that the effect of prior tightening and base effects are enough to see meaningful declines in core inflation throughput the euro zone. If that materializes, the ECB would be able to soften their hawkish rhetoric and possibly favour a pause in the not too distant future. In this scenario, EUR/JPY has the potential to accelerate recent losses.

The next level of support appears at 151.61 as prices move away from overbought territory at speed. 156.85, the September 2008 level appears as most imminent level of resistance before the swing high of 158.00 flat can be considered. Given the trend in European data, there could well be more selling yet.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX