Key Insights
- USD/JPY trades near 153.20 as markets anticipate potential BoJ rate hike and tapering
- Yen gains support from official concerns over forex volatility and weak currency impacts
- Technical analysis shows USD/JPY testing descending channel with RSI in oversold territory
USD/JPY Fundamental Analysis
The Japanese Yen is gaining momentum as markets brace for a potentially pivotal Bank of Japan (BoJ) policy meeting on Wednesday. Speculation is rife that the BoJ may finally lift rates by 10 basis points to 0.1% and outline plans to taper bond purchases, marking a significant shift in Japan’s monetary policy landscape. This anticipation is not only bolstering the Yen but also prompting traders to unwind carry trades ahead of the decision.
Adding to the Yen’s strength, Japan’s top currency diplomat, Masato Kanda, has highlighted the negative impact of forex volatility on the Japanese economy. This statement, coupled with the top council’s urging for the government and BoJ to be mindful of the weak Yen, underscores the growing concern over currency depreciation.
Meanwhile, the US Dollar is facing headwinds as cooling inflation and a softening labor market in the United States fuel expectations of multiple Fed rate cuts this year. Markets are now pricing in the possibility of three cuts, with the first potentially coming as soon as September.
A Reuters article detailing the BoJ’s policy review suggests Japan is “ready for higher rates,” although no changes to the price goal or policy framework are expected. This backdrop of potential policy divergence between the Fed and BoJ is creating a compelling narrative for Yen strength.
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USD/JPY Technical Analysis
Turning to the technical analysis, USD/JPY is currently trading around 153.20, testing a descending channel that points to a strengthening bearish bias. The 14-day Relative Strength Index (RSI) has dipped below 30, indicating oversold conditions and hinting at a possible short-term rebound.
Key levels to watch include the lower boundary of the descending channel near 153.00. A break below this level could accelerate the downward momentum, potentially pushing the pair towards May’s low of 151.86, with the psychological 151.00 level providing additional support.
On the upside, resistance is found at the “throwback support turned resistance” level of 154.50. Beyond this, the nine-day Exponential Moving Average at 155.24 and the upper boundary of the descending channel around 156.20 represent significant hurdles for any bullish reversal.