USD/JPY: dollar weakness back in vogue, 108 on the cards or recovery still underway to 114?

Currently, USD/JPY is trading at 110.12, down -0.11% on the day, having posted a daily high at 110.69 and low at 109.91.

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USD/JPY has stabilized considering that in fact the near-term balance of risk still favors continued JPY weakness on the back of an improvement in the broader market tone and recovery in Fed tightening expectations, as analysts at Scotiabank explained. "Spreads are widening in a JPY-negative manner and USD/JPY’s sustained push back above 110 reduces the vulnerabilities associated with short-positions established in the period from mid-June," the analysts added.

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The dollar's resurgence has been losing traction today but only given the miss in PCE inflation that the Fed will be concerned about. However, yesterday's GDP surprise for Q2 is laying the foundation for a good performance in Q3 and could well prompt the Fed to fulfill its suggestions of starting to reduce the balance sheet as early as next month's meeting. Also, Trump's tax plans are now circulating among its members of the Senate which are an additional supportive factor for the dollar bulls.

However, analysts at Nomura still expect the Trump administration to pursue a weak dollar policy and expect US political risks to continue to weigh on the dollar (while the euro area situation continues to improve). For the near term, markets are keeping an eye on Wall Street today (benchmarks are in the green, bearish for yen) and indeed, nonfarm payrolls tomorrow will be a key driver for the pair.

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USD/JPY levels

Analysts at Commerzbank explained that USD/JPY has recently sold off to, tested and reversed from its 108.13 April low. "It has charted a key day reversal which has eroded the near term resistance line and this suggests recovery to the 111.05 current August high and the 111.20 55 day ma. Above here would target the 112.53, the 200 day ma. There is scope for the top of the range at 114.38/49," argued the analysts. However, a break below the 110 handle with daily closes could be the runway to test the 108.13 level again for a possible range breaker on the flip side.