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Yesterday, the US currency sharply depreciated throughout the market, responding to unexpected comments by the head of the Federal Reserve Bank of New York, John Williams. In just a few hours, the dollar index dropped from 96.86 points to 96.35 points, showing a general weakening of the currency. During the Asian session, the dollar somewhat regained its position, but the very fact of such a situation suggests that the position of dollar bulls is precarious - even careful verbal interventions can stop the growth of the greenback.

It is noteworthy that Williams quite diplomatically voiced his concern about the current situation in the country's economy and hinted rather at the need to ease monetary policy. He said that he considered it expedient to apply preventive measures on the part of the Fed in order to "solve the existing problems" and not to deal with their consequences later. But these words were enough for the market to make the appropriate conclusions for themselves: according to traders, the Fed representative signaled a rate cut at the July meeting once by 50 basis points.

Exchange Rates 19.07.2019 analysis

The Federal Reserve Bank of New York clearly did not expect such a violent market reaction to the comments of their boss. Therefore, soon after his speech, the release of the FRB press service appeared, which explained Williams's position. The Federal Reserve Bank stated that he voiced only a "scientific approach" to the problem, and did not announce the next steps of the Fed. After that, the dollar won back a little, although traders are still wary of the prospects for its growth. The fact is that yesterday, at almost the same time, another representative of the Fed spoke - Richard Clarida. He also called on members of the regulator "to be proactive," as current economic growth needs support from the Fed. In other words, the likelihood of "aggressive mitigation" by the Fed is still not worth discounting, although after the last macroeconomic releases (Nonfarma, inflation, retail sales) the market has eased its concern about this. In my opinion, this is a very untimely decision.

And yet, the fact remains that the dollar is still "on horseback", although it cannot demonstrate a large-scale rally. There is uncertainty about the prospects for US-China relations, as well as background fear about possible currency interventions initiated by Trump, muffle the ambitions of dollar bulls. But the current situation can be used in trade, especially in the dollar-yen pair. The usd / jpy pullback provides a tempting opportunity to open short positions in a pair. Given the growth of geopolitical tensions, as well as the dovish intentions of the Fed, it can be assumed that the current correction will be temporary - after its completion, the price will again go to the base of the 107th figure, or to be more precise, to the resistance level of 107.05 (lower Bollinger Bands indicator line on the daily chart).

At the end of June, the bears for usd / jpy currency pair had already tested this resistance level, and even updated the annual minimum, dropping to 106.80. However, against the background of optimistic statistics from the USA, the pair could not develop a further downward trend and returned to the range of 107.70-108.80. In the near future, a retest of the above resistance level is likely, even with a likely renewal of the annual minimum.

It is worth noting that today's price pullback usd / jpy is associated not only with the recovery of the US currency. The yen is under pressure and has its "own" problems. The fact is that today key inflation indicators were published, which demonstrated its slowdown. And although all the indicators came out at the forecast level, the Japanese currency still negatively reacted to this release. Basic inflation disappointed most of all - the consumer price index excluding prices for fresh food products is falling at a fairly sporting pace. If in April this indicator was at the level of 0.9%, in May it was 0.8%, and in June - already at around 0.6%. The structure of the published indicators suggests that inflation has slowed, mainly due to a sharp decline in energy prices and a reduction in mobile communication tariffs by the main Japanese operators.

Exchange Rates 19.07.2019 analysis

It is logical to assume that the fact of the fall in core inflation to the levels of 2017 will not be ignored by the Bank of Japan, whose representatives have repeatedly stated that they are still ready to expand incentives. According to some experts, the Japanese regulator realizes his intentions already at the July meeting, although according to other analysts, the main events in this context will unfold in September. The fact is that the meeting of the Japanese regulator will be held just a day before the Fed meeting (July 30 and 31, respectively). As many currency strategists believe, the Bank of Japan will not take drastic steps until the Fed has announced its verdict on the prospects for monetary policy. In other words, at the July meeting, the Japanese Central Bank may announce its actions,

Thus, as soon as the first reactions regarding the weak inflation in Japan have subsided, geopolitics will again be in the spotlight of usd / jpy traders. Increased tensions in the Middle East (primarily through the US-Iran line), an increase in the likelihood of a "tough" Brexit, a political crisis in Italy and vague prospects for trade negotiations between Washington and Beijing are a brief list of the fundamental factors that will support the Japanese currency (for account of its status as a protective asset) and, accordingly, pressure on a pair of usd / jpy. Under such conditions, a repeated assault on the resistance level 107.05 is very likely.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Irina Manzenko,
Analytical expert
InstaForex Group © 2007-2019
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