USD/JPY after rallying to the upside has eased back to support and we view USD/JPY as an attractive risk to reward buy.

The USD has seen a big sell-off to the downside as the market sees a very dovish Fed – the sell-off has been broad-based and the low-yielding JPY has pushed the USD back to support.

US Interest Rate Outlook

Markets are fully priced for a 25-basis point cut next month. Also, current pricing sits at a 36% chance for a bigger cut of 50 bps, up from 29% a week ago, according to the CME Group's FedWatch Tool.

In terms of into the end of the year -“OIS pricing for 100bp of easing by year-end means markets are positioned for a soft landing paired with no more inflation bumps. And while Powell’s explicit rate cut guidance has some significance, investors had fully priced in easing well before Jackson Hole and the negative USD reaction to the speech looked a bit overdone.” (ING)

We don't see the pricing get worse for the USD and expect fewer rate cuts from the Fed than the market does.

Bank of Japan Interest Rate Outlook

Japan's policy rate is around 0.25% even after two rate hikes this year. The U.S. federal funds rate is at a 23-year high of 5.25% to 5.5%. Even with a 100 bps of cuts by the end of the year the carry against the JPY is still very attractive

Shoki Omori, a chief desk strategist at Mizuho Securities, sees retail and institutional investors resuming yen carry trades, barring a financial crisis. "Investors such as corporates, bank treasuries, and central banks are going to like these [carry] trades as they are simple and the duration is short," he said. "Similarly, retail investors are looking for dip-buying opportunities, meaning going back long on higher yield currencies," such as the dollar.

The BaNk of Japan have noted they are worried about market volatility in terms of raising rates and also the recent rise in the JPY, will dampen inflationary pressure. When will the Bank of Japan raise rates again? The Bank of Japan is in no hurry to do so and most forecasters see a move to just 0.5% later in the year.

Sentiment

The recent flush out of speculative shorts saw a big rally in the JPY but now they are moving long while smart money commercials who were right about the JPY rally have now gone short which we think points to a move up in the USD against the JPY.

Technical Analysis

The key levels of support and resistance to look out for are below.