Critical Analysis of Current USD/JPY Price Actions

Critical Analysis of Current USD/JPY Price Actions

The recent price movements of the USD/JPY pair have shown a negative reaction just below the key resistance level of 150.70. A significant drop of -435 pips or -2.9% occurred, leading the pair to hit a low of 146.48 on 8 March. Following this, there was a gradual upward movement that brought the USD/JPY back above the psychological level of 148.00. This movement can be attributed to the US inflation data for February, which indicated that the Federal Reserve might hold off on cutting the Fed funds rate in the upcoming months.

Despite positive news from Japan, such as the announcement of a significant wage increase of 5.28% by Rengo, the largest trade union federation in Japan, the JPY failed to gain strength. Bank of Japan Governor Ueda has emphasized the importance of a sustainable wage increase in the decision-making process of the Bank of Japan to normalize its ultra-accommodative monetary policy. Reports suggest that BoJ is considering raising the short-term interest rate and potentially scrapping the Yield Curve Control program, signaling a shift in monetary policy.

Current Price Action

The current price movements of the USD/JPY pair do not seem to align with the underlying fundamentals and positive news flow that should support JPY strength. Despite the wage hike results and potential changes in BoJ’s monetary policy, the USD/JPY continued to rally and reached an intraday high of 149.33. The USD/JPY pair is currently the top performer among major currencies with a 5-day rolling performance showing a gain of +1.5%.

The JGB yield curve has been experiencing a bear-steepening trajectory, driven by rising long-term yields. This trend indicates that the Japanese economy is not reverting to a deflationary environment, giving BoJ room to normalize its monetary policy. Additionally, the yield spread between US Treasuries and JGBs remains below key resistance levels, suggesting a potential for further movement.

The recent rally in the USD/JPY pair has approached a key inflection level of 149.50, where the 20-day moving average acts as a resistance. There are multiple technical factors converging at this level, including former swing lows, Fibonacci retracement levels, and a bearish divergence on the RSI indicator. Failure to surpass the 149.50 resistance could lead to a bearish reaction, with potential support levels at 148.80/60 and 147.95. On the other hand, a clear break above 149.50 could invalidate the bearish bias and target resistance levels at 150.15 and 150.65/85.

The current price actions of the USD/JPY pair exhibit a disconnect between fundamental factors and actual market movements. Despite positive news from both the US and Japan, the USD/JPY continues to rally, suggesting a potential mispricing in the market. Traders and investors should closely monitor key resistance and support levels, as well as technical indicators, to navigate the current volatility in the USD/JPY pair.

Technical Analysis

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