The recent comments from the Bank of Japan’s deputy governor caused USDJPY to increase by more than 2%. The statement mentioned that the central bank would refrain from raising interest rates during periods of market instability. This led to a surge in buyers in the Japanese markets and contributed to USDJPY extending its 4% rebound from the lows experienced earlier in the week. It is intriguing to observe that despite the Bank of Japan’s decision to hike rates from 0.1% to 0.25%, yen speculators did not initially respond positively. In fact, the yen depreciated by about 0.6% within the first hour after the announcement.
The shift in fundamentals resulting from the rate hike triggered an unwinding of the carry trade, putting pressure on the markets at the beginning of the week. The decision was intended to bring stability to the markets without reversing the ongoing course of monetary policy, especially as both Japan and the US are in the process of normalizing interest rates. With inflation in Japan hovering around the 2% target for nearly two years, the central bank seized the opportunity to move away from a period of zero interest rates. Conversely, the Federal Reserve is facing challenges with slowing price growth and a cooling labor market, necessitating a shift towards a long-term average rate of 2.8%.
From a technical perspective, the current rise in USDJPY appears to be a much-needed rebound from extreme oversold conditions. The relative strength index (RSI) on the daily timeframe plummeted to 13, a level not witnessed since 1997 and 1995. Historical data indicates that previous instances of such bounces were followed by renewed bearish momentum, leading to updated lows before a long-term reversal occurred. Although USDJPY could potentially rally back to the 149.50 range, which aligns with the 61.8% Fibonacci retracement level, caution is advised. Previous market trends have shown contentment with less severe pullbacks to around 76.4%, suggesting the likelihood of the pair’s recovery momentum fading rapidly. The 146.0-146.5 region previously served as support in February and March, and now poses as a formidable resistance level that could impede further upward movement.
Despite the bearish view on USDJPY’s prospects, a breakthrough above 149.50 in the upcoming days could alter the narrative. Confirmation of a bullish trend would be signaled by surpassing the 200-day average of 151.60, below which the pair plummeted post the Bank of Japan’s rate hike decision. The ultimate direction of USDJPY hinges on multiple factors such as market sentiment, global economic conditions, and central bank policies, making it imperative for traders and investors to stay vigilant and adapt to evolving scenarios.
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