USD/JPY bounced off the major 155.00 support zone after dovish comments from Fed Governor Christopher Waller weakened the dollar broadly. At the same time, yen short positions are unwinding on capital repatriation and rising bets on faster Bank of Japan rate hikes, with the outcome now hinging on the US CPI report and the BoJ's September decision.
USD/JPY dropped back to the 155.00 support zone before dip-buyers stepped in and sellers took profit, leaving the pair caught between a pullback and a resumption of its longer uptrend. The next move depends largely on this week's US inflation data and the Bank of Japan's rate hike decision.
Waller's dovish shift pressures the dollar
The dollar weakened across the board after Fed Governor Waller struck a surprisingly dovish tone, saying he is finally seeing signs of disinflation and would be willing to wait another month to let it continue. He added that a September hike would depend on the upcoming CPI report. As a result, rate hike odds for the September Fed meeting dropped to just 48%, from higher levels earlier in the summer.
Yen bears start to retreat
On the other side of the pair, sentiment toward the yen is shifting too. According to Rong Ren Goh, a fixed income portfolio manager at Eastspring Investments: "The market psychology around the yen appears to be changing." Citigroup data show yen positioning has flipped from bearish to bullish since early August, and the yen is on pace for a 2.3% weekly gain against the dollar, its sharpest since the joint US-Japan intervention in late July.
BoJ hike odds surge, carry trades unwind
Markets are also repricing the BoJ's path. Odds of a 25 basis-point September hike have risen to 97%, up from 52% a month ago, according to Tokyo Tanshi data, with a 27% chance of a further move in October and 56% odds by December. That narrowing rate gap is unwinding carry trade positions built when the yen was cheap. J.P. Morgan estimates yen short bets have swelled to around 17 trillion yen ($108.74 billion) since Prime Minister Takaichi took office last October, and its analysts say a full unwind could push USD/JPY down to the 142–146 range.
On the daily chart, USD/JPY's bounce off 155.00 leaves dip-buyers positioning for a rally back toward 160.50 resistance, while sellers need a break lower to open the door to the 152.50 support level next.
Sources: Investinglive, Investing.com
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