The recent comments from the Bank of Japan’s deputy governor have had a significant impact on the USDJPY movement. The currency pair jumped more than 2% after the comments, which reduced the chances of further policy tightening in the near future. The central bank’s stance on not raising interest rates when markets are unstable brought buyers back into the Japanese markets, leading to a 4% rebound in USDJPY from Monday’s lows.
Initial Yen Speculators Reaction to Rate Hike
Interestingly, yen speculators did not react positively to the Bank of Japan’s rate hike from 0.1% to 0.25%. In fact, the yen lost around 0.6% in the first hour after the decision was announced. This unexpected reaction triggered an unwinding of the carry trade and added pressure on the markets at the beginning of the week.
Both Japan and the US are in the process of normalizing interest rates. In Japan, inflation has been hovering close to the 2% target for nearly two years, allowing the central bank to move away from a period of zero interest rates. On the other hand, the Fed is facing challenges with slowing price growth and a cooling labor market, prompting a shift towards a long-term average rate of 2.8% from the current 5.25-5.50% estimated by the FOMC.
Technical Analysis of USDJPY Movement
From a technical perspective, USDJPY’s recent rise appears to be a necessary bounce from extreme oversold conditions. The RSI dropped to 13 in the daily timeframe, a level not seen since 1997 and 1995. However, history shows that such bounces were followed by renewed bearish momentum and new lows before a long-term reversal occurred.
The USDJPY could potentially bounce back towards the 149.50 area, which aligns with the 61.8% Fibonacci retracement level. Historically, markets have been content with less severe pullbacks to around 76.4%, suggesting a possible retreat to 146.5. The 146.0-146.5 zone previously served as support and could now act as a formidable resistance level, hindering further upward movement for the pair.
Outlook for USDJPY’s Future
The bearish view on USDJPY’s prospects could be overturned if the pair manages to break above the 149.50 level in the coming days. A move beyond the 200-day average of 151.60, below which the pair fell post the Bank of Japan’s rate hike announcement, would confirm a shift in momentum towards a bullish trend.