USD/JPY: Buying dips with Fed rate cut bets looking bloated

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Fed rate cut pricing appears rich relative to recent data flow. And USD/JPY remains beholden to moves in short-dated US interest rates. So, unless we see a hard economic landing, downside for US yields, and USD/JPY, may be limited in the near-term. It’s going against the grain a little but buying USD/JPY dips is favoured.

The daily USD/JPY chart tells the story; 146.00 has been an important pivot level going back nearly a year, acting as both support and resistance over that period. There have been lots of bearish probes over this period, but the only ones that have stuck have been where there’s been a sudden rush to pile on US rate cut bets. And even then, they didn’t last long.

With US Fed funds futures favouring seven cuts by June, I wonder how much further markets can add to dovish bets without a hard economic landing? With a correlation of 0.95 with rate-sensitive US two-year bond yields over the past month, unless we see such a scenario, the risk of meaningful downside in USD/JPY looks limited.

And then there’s the price action we’ve seen recently.

You can see there have been numerous dips towards 146.00 over the past fortnight since the initial panic, but only two have been successful in breaking below the level. And when they did, the move was reversed quickly.

Buyers are lurking below. Unless we see another big increase in dovish Fed rate cut bets, which Jerome Powell is unlikely to promote when he speaks at Jackson Hole, why not join them in looking for USD/JPY upside?

Buying below 146.00 with a stop underneath Monday’s low is one potential setup, allowing traders to establish longs looking for a retest of 148.80 or former uptrend support which is currently located just above 149.00.

DS