Summary:

The Fed kept rates unchanged in June, raised its inflation outlook, and hinted at only one rate cut in 2024. This stance could benefit the USD as market expectations adjust. The BoJ maintained its JGB purchases, weakening the yen. Governor Ueda hinted at possible tapering in July but remained cautious, suggesting further JPY weakening.

USD/JPY 4H

Macro View:

USD: In June, the Federal Reserve kept interest rates unchanged but raised its inflation outlook while maintaining its growth outlook. Consequently, the Fed revised its rate outlook, with the updated dot plot indicating only one rate cut in 2024, a more hawkish stance compared to the May meeting. Chair Powell emphasized that the Federal Open Market Committee (FOMC) is not yet ready to cut rates, despite welcoming the softer-than-expected CPI data for May. He stressed that the Fed is data-dependent and wants more evidence of inflation deceleration before easing policy. Since US rate market expectations have not fully aligned with the updated Fed dot plot, the USD could benefit as rate cut expectations are adjusted further.

JPY: The yen weakened during the BoJ meeting, as the Bank of Japan once again failed to meet market expectations of slowing the pace of JGB purchases, which remains close to JPY 6 trillion. However, during Governor Ueda's press conference, he mentioned that the BoJ would only consider tapering bond purchases at the July meeting. Ueda also noted that uncertainties over the inflation outlook remain "high" and that the BoJ is "paying close attention" to the FX impact on inflation, acknowledging that further yen weakness could increase inflation. Overall, Ueda's tone remained cautious, indicating a continuation of accommodative policy despite a hawkish tone on July meeting expectation. As a result, the JPY could weaken further as investors push back against the likelihood of a more aggressive tightening cycle.

DXM: A Tool to Gauge Retail Sentiments

USD/JPY Current Retail Long/Short Position

The DXM shows that 37% of traders are bullish, while the remaining 63% are bearish, reflecting the predominant retail sentiment. This sentiment offers a contrasting trading opportunity since retail traders tend to consistently lose money in the long term.

Seasonality Analysis: The Historical Movement of the Currencies  

USD Futures’ seasonality movement

The seasonal pattern for the USD suggests bullish momentum in the near term.

JPY Futures’ seasonality movement

The seasonal pattern for the JPY suggests bearish momentum in the near term.

Sources: Prime Market Terminal

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