The US dollar fell back sharply against the Japanese yen currency due to optimism that the Fed could start to become less aggressive with its rate hikes and the Bank of Japan may alter its policy to accommodate rising inflation.
Technical analysis is clearly showing that the USDJPY pair has reversed negative price divergence extending down to the 131.00 price area during the recent epic drop which saw a 500 pips decline.
In terms of explaining the move lower Rabobank make a great case. The bank analyst team notes that “The BoJ is clearly the outliner amongst its G10 peers. While all the others are gripped by a determination to dampen the inflation rate, the BoJ is attempting to nurture it.”
Rabobank add that “Having struggled with disinflationary and deflationary pressures for decades, Governor Kuroda sees an opportunity to finally create a virtuous cycle between wage inflation, demand and corporate profitability. Speculators have been disappointed that the BoJ has stuck to its hugely accommodative policy during the past few months. “
And finally they note that “However, green shoots are appearing in relation to wage inflation that suggest that the BoJ could alter its YCC policy in the foreseeable future on its own terms. The move lower in US bond yields from their June highs and the resultant fall in the spread vs. JGB yields has reduced pressure on the JPY and, for now, vindicated the decision of Kuroda not to pander to speculators. USDJPY is likely to remain sensitive to moves in US yields. For now it seems that USDJPY may favour a 130 to 135 trading range.”
According to the ActivTrader Market Sentiment tool, 71% of traders are bearish towards the USDJPY pair. This is a drop of 10% in sentiment since last week,
Considering that the pair is close to breaking the 131.00 level, and the sentiment dropping, I think we could probably see more downside ahead in the USDJPY pair towards the 130.00 or 128.00 area.
USDJPY Short-Term Technical Analysis
Technical analysis on the daily time frame shows that the USDJPY pair has started to form a large head and shoulders price pattern with huge downside potential based on the size of the pattern.
The USDJPY pair certainly looks like if the pattern is activated then a drop towards the 125.00 level could happen. Please also note that the 50-period MA is starting to cross below the 200-period MA.
USDJPY Medium-Term Technical Analysis
The daily time frame is showing that the USDJPY pair has reversed all forms of negative price divergence during its recent price pullback towards the 130.00 support zone.
It is also noteworthy that the USDJPY pair is still being bought strongly on price pullbacks and could appears well placed to tackle the 140.00 level while trading above the 131.00 area.