Traders are unwinding record short positions on the Japanese yen ahead of the US CPI report, leaving USD/JPY pinned below major resistance at 163. Futures data points to short covering rather than fresh bullish conviction, and lingering intervention risk suggests further gains could be harder to earn.
Easy gains on USD/JPY may be harder to come by, though that does not mean the pair cannot move higher. According to FOREX.com analyst Matt Simpson, traders remain wary of intervention while Japan explores ways to support the yen without directly stepping into the market, a mix that could let USD/JPY grind higher while keeping volatility elevated. The pair is now testing resistance ahead of the US inflation report, with markets still pricing in a hawkish Fed.
Yen volatility cuts both ways
Volatility has returned to the Japanese yen over the past few weeks. A market-led selloff into the 2 July non-farm payrolls report saw USD/JPY fall by as much as 200 pips before recouping those losses over the following four days. On Friday, the pair fell more than 100 pips on reports that Japan's largest pension fund had been instructed to buy domestic assets.
That development matters because it suggests Japan is testing alternatives to traditional currency intervention. The approach could let policymakers avoid swimming against the tide while the Federal Reserve keeps a hawkish stance and US economic data continues to outperform.
Futures data shows short covering
Gross short positions had climbed to record highs among both asset managers and large speculators, pushing net-short exposure close to two-year highs for both groups. However, the latest Commitment of Traders report showed a clear reduction in bearish positioning last week. Gross short exposure was cut by a combined 48.8k contracts, falling 11.6% among large speculators and 12.7% among asset managers.
Long positions increased only marginally, making this a story of short covering rather than fresh bullish conviction.
CPI holds the key
On the charts, prices are testing the weekly R1 pivot point while holding above their daily, weekly and monthly VWAPs. Simpson flags the July VPOC at 162.69 as resistance, aligning with last week's high, while support clusters around 162.
The inflation print now sets the direction. A hot CPI report could tempt bulls above 163, but the bigger move may come from a softer print that rotates USD/JPY lower within its recent range between 160 and 162.50. CPI will need to surprise decisively to the upside for any breakout above 163 to prove sustainable.
Source: FOREX.com
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