The recent comments made by the Bank of Japan’s deputy governor had a significant impact on the USDJPY pair, causing it to jump more than 2%. The statement that the central bank will not raise interest rates when markets are unstable brought buyers back into Japanese markets and helped USDJPY to extend its rebound from Monday’s lows. It is evident that market stability plays a crucial role in the central bank’s decision-making process, as reflected in the reaction of currency speculators to the rate hike from 0.1% to 0.25%.
The change in fundamentals triggered an unwinding of the carry trade and added pressure to markets at the beginning of the week. While Japan has been successful in achieving inflation close to the 2% target for almost two years, the Fed is facing challenges with slowing price growth and a cooling labor market. This contrast in economic conditions between Japan and the US is contributing to the normalization of interest rates in both countries.
From a technical perspective, the USDJPY’s recent rise appears to be a necessary bounce from extreme oversold conditions. The Relative Strength Index (RSI) reached a low of 13, a level not seen since 1997 and 1995. However, historical data suggests that such bounces were followed by fresh bearish momentum and updated lows before a long-term reversal occurred. The current resistance level at 149.50, near the 61.8% Fibonacci retracement level, may pose a challenge for the pair. Previous instances have shown that the market was content with less severe pullbacks to 76.4%, indicating the possibility of a quick fade in recovery momentum.
The 146.0-146.5 area, which acted as support in February and March, has now transformed into potential resistance. This shift could impede the pair’s upward movement for an extended period. However, a break above the 149.50 level in the coming days could alter this bearish outlook. Additionally, surpassing the 200-day average of 151.60, below which the pair fell following the Bank of Japan’s rate hike decision, would serve as confirmation of a bullish trend.
The recent movements in the USDJPY pair have been influenced by a combination of fundamental economic factors and technical indicators. While the Bank of Japan’s comments sparked a significant shift in market sentiment, it is important to consider both historical patterns and key resistance levels in assessing the future direction of the currency pair. Traders and investors should closely monitor market developments and news to make informed decisions regarding their positions in USDJPY.