Will USDJPY Continue to Fall to 140.00 to 130.00 Range?

Over the past week, the US dollar showed signs of initial strength but has since experienced a notable decline. This weakening is primarily attributed to growing market expectations surrounding a potential 50-basis point rate cut by the Federal Reserve. The speculation intensified following a recent report suggesting that the Federal Open Market Committee (FOMC) could opt for a more aggressive cut than previously anticipated. As a result, the USD has come under pressure, particularly in its exchange rate against the Japanese yen (USD/JPY). I’m now believe that USDJPY may settle into a lower trading range, potentially hovering between 130.00 and 140.00, should the Federal Reserve proceed with the projected rate cut.

DXY 4H Chart

While the Federal Reserve's rate decision remains at the forefront of market attention, the Bank of Japan (BoJ) is expected to stay on its path of incremental rate increases. Recent figures released by Japan’s Ministry of Finance highlight evolving trends in Japanese investor behaviour. Notably, there was significant selling of European bonds during July, largely driven by political uncertainties within the Eurozone. However, a shift occurred in August, when Japanese investors made a decisive return to foreign bond markets. This was marked by a record-breaking surge in the purchase of overseas bonds, spearheaded by banks and trusts.

USDJPY Chart 

This renewed bond buying activity, coupled with potential unhedged foreign investments, signals ongoing strength in the Japanese yen. Additionally, market participants have been scaling back on short positions, further supporting the yen's upward momentum. Looking ahead, should the Federal Reserve implement the anticipated larger rate cut, the yen's appreciation is likely to persist, adding downward pressure on the USD/JPY exchange rate. The Bank of Japan's upcoming policy meeting is expected to reaffirm its commitment to gradual rate hikes, which could further bolster the yen soon.

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