FX Daily Strategy: Asia, Jul 31

The Bank of Japan is expected to keep its policy rate unchanged at 1% during its July 31 meeting. Underlying inflation is showing signs of stabilizing within the target range, anchored by strengthening wage growth. Following the 25bps hike in June, this pause provides breathing room as policymakers reassess the latest geopolitical developments in the Middle East. Renewed Middle East tensions and volatile crude oil prices act as a complex backdrop for the BoJ. While spike in energy costs will once again squeeze household purchasing power, they also exacerbate imported inflation and keep USD/JPY under pressure near multi-decade highs. A temporary pause allows the BoJ to evaluate whether recent oil fluctuations will reignite severe cost-push inflation and if Japanese corporate price- and wage-setting behaviors can continue transitioning smoothly toward a sustainable, demand-driven model.

Forward guidance is expected to remain largely unchanged from recent policy statements, maintaining a cautious, data-dependent tightening bias. A hold at 1% is set for July, market anticipation favors a move in October to keep pace with inflation risks. October’s meeting aligns the expiration of energy subsidies, clearer visibility on how Middle East conflict settle, fresh Q3 real wage data and the release of the updated Quarterly Outlook Report. This gives the BoJ a clean, data-backed runway to think about hiking rates.

Without a strongly hawkish forward guidance, JPY buyers will likely be disappointed. In fact, market participants are destined to be disappointed. Chatters has push a October hike while BoJ barely managed to roll out a 25bps hike in June. It would be out of character for their to show urgency, in times of strong cost push inflationary pressure and no extra strength in demand. Wage and domestic demand is indeed supportive for a hike but how the BoJ phrase it will be important as terminal rate expectation is no more than 2%.

On the chart, the pair settled back in range from the 164.00 high of last week as prices unwind overbought daily studies. Pullback from the 164.00 high see bullish momentum showing signs of faltering. Nearby see support at the 163.24 and 162.84 recent July highs. Would take break here to ease the upside pressure and open up room for deeper pullback to correct strong gains from the 155.00 May low. Lower will see room to support at 162.00 congestion then 161.28/00 area. Meanwhile, resistance at the 164.00 is expected to cap. Clearance, if seen, will open up room for extension to retest 164.55/164.95 highs of November 1986. 

With the weekend close by, market attention will be rerouted back to geopolitical tension. It is looking more likely we are back to the previous week where U.S. and Iran exchange rocket as the pause is broken by Iran's surprise attack. 

And where are we heading, is either a land invasion from the U.S. or more infrastructure strike. The latter will be more likely, given the cost of a dragged land invasion. Nuclear option is not on the table but Trump may threaten to use them as the last round of pressure tactics. Trump seems like to be an egoistic man, yet deep down he is a business man. All tactics are leading to producing a beneficial deal for him or the U.S.. Scotched earth with no yield still seems unlikely.

Market participants will very much want to avoid the weekend risk and should see positions being exited on Friday unless there are new headlines.