Escalating global trade tensions, political risk in Europe and geopolitical uncertainties initially stimulated appetite for safe-haven assets, including the Yen.

However, an appreciating Dollar and prospects of higher US interest rates effectively sabotaged the Yen’s upside potential.

With the USDJPY concluding Q2 within the same modest range identified at the start of 2018, it is clear that the currency pair is still caught between trade war fears and prospects of higher US interest rates.

There is a possibility that the Japanese Yen remains driven by external forces as we head into the third trading quarter of 2018.

With Japan’s economy contracting 0.2% on a quarterly basis during the first quarter of 2018, and inflation remaining stubbornly low, the Bank of Japan is unlikely to normalize monetary policy anytime soon.

Weak domestic consumption also remains a headache to policy makers, especially when considering how it accounts for over 50% of Japan’s GDP.

While the BoJ is expected to remain on standby this year, the Federal Reserve seems poised to raise US interest rates at least two more times.

The widening difference in the monetary policy stance between the BoJ and Fed provides a valid argument for further upside on the USDJPY.

Although the odds seem stacked against Yen bulls bouncing back, a lifeline could be offered if trade tensions escalate uncontrollably towards something worse.

A global trade war is likely to negatively impact growth and spark uncertainty, consequently prompting investors to rush to the safety of the Yen.

Focusing purely on the technical outlook, although the USDJPY continues to respect a bearish channel on the monthly timeframe, there seems to be a struggle for sellers to take full control.

The monthly close above 110.00 suggests that prices could challenge the 50% and 61.8% Fibonacci retracement levels, which are outside of the monthly bearish channel.

On the weekly charts, previous resistance is likely to transform into a solid dynamic support that encourages a move towards 112.30 and 114.50, respectively.

Alternatively, if bulls lose momentum and fail to keep control above 110.00, the USDJPY has scope to decline towards 107.54.

Interestingly, the daily charts illustrate a heavily bullish picture with the USDJPY consistently printing higher highs and higher lows.

Technical lagging indicators like the MACD point to further upside with 111.00 in sight.

A decisive breakout above this level could inspire a move higher towards 111.60 and 112.30, respectively.

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