The ongoing purge in carry trades continues to benefit low-yielding currencies, particularly the yen and the Swiss franc. USD/JPY broke below the key support level at the 100-day moving average (155.37) on Wednesday, sparking increased downside momentum and hitting a low of 153.10, the lowest level since early May. The growing interest in the Bank of Japan’s (BoJ) upcoming meeting next week has added to the yen short squeeze, with the probability of a potential rate hike drifting higher. This heightens the significance of the Tokyo inflation figures due on July 26.

Market pricing now assigns a 62% chance of a BoJ hike at the July 31 meeting, up from 40% on Monday. However, more than three-quarters of economists in a Reuters poll believe the central bank will hold rates steady this month. This discrepancy indicates that either outcome—whether a hike or a hold—will likely surprise the markets. With a week remaining until the BoJ meeting and in light of the recent yen appreciation, headline risk remains elevated.

The yen extended its rally as USD/JPY continued to close the gap with U.S. yields. The rising odds of a BoJ hike have added fuel to the carry trade purge. The Tokyo CPI data on July 26 is expected to be more market-moving than usual due to the current economic context. As we approach the BoJ meeting, the headline risk will stay high.

Following the break of the 100-day moving average, there is little in the way of key support until the 151.53-86 range. Near-term resistance is found at 155.00 and the 100-day moving average at 155.37. The current dynamics underscore the heightened sensitivity of USD/JPY to both domestic and international economic signals, with traders closely monitoring upcoming data releases and central bank communications.

Open an account today to unlock the benefits of trading with CMS Financial

Open Account Now 💼