USD/JPY plunged 1.4% to 156.20, its lowest close in six weeks. USD/JPY started retreating below 160 on July 11 after spending 11 days in a 160-162 range. Yesterday’s break below 158 (50-day moving average) opened the door towards 155.10 (100d MA). The yield carry trade against the JPY faces domestic and external risks. Apart from suspected currency interventions by the Japanese government, Bank of Japan Governor Kazuo Ueda said last month that the central bank could raise interest rates again at its meeting on July 31. Tomorrow, consensus expects Japan’s National CPI inflation to rise a second month to 2.9% YoY in June from 2.8% in May, and excluding food, to 2.7% from 2.5%. BOJ will likely announce a detailed plan to reduce its balance sheet. On the US front, the Fed is opening the door to start lowering US interest rates this year while leading US presidential candidate Donald Trump decried the JPY’s massive weakness. Hence, USD/JPY cannot ignore the narrowing yield differential between US and Japanese bonds. We maintain our forecast for USD/JPY to decline to 150 by the end of 2024 and 139 by December 2025. 
EUR/USD appreciated by 2.1% to 1.0940 so far in July from its trendline support near 1.07. This month’s rally was attributed to the European Central Bank’s signal at its forum in Sintra (on July 2) for a pause at today’s governing council meeting vs. more Fed officials opening the door for a rate cut this year on US inflation resuming its decline amid over the rise in the unemployment rate. Politically, EUR was relieved that the far-right National Rally party fell to third position in the second round of the French elections despite its outsized gains in the first round. However, EUR/USD is coming up against a significant trendline resistance of around 1.0970. EUR is feeling the drag from some unwinding of yen carry trades. EUR/JPY retreated after peaking at 175.45 on July 11; it broke below its 100-day moving average to 170 yesterday. The OIS market sees an 84.5% chance of the ECB paving the ground for a second rate cut in September. Today’s ECB Survey of Professional Forecasters may show that EU inflation mirrors the resumption of disinflation in the US. The Eurozone Sentix Investor Confidence fell to -7.3 in July from +0.3 in May, while the ZEW Sentiment Index declined to 43.7 from 51.3.
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