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The US dollar is having staged a big recovery against the Japanese yen currency, following strong demand for the pair around the 107.50 level and the conclusion of the Bank of Japan policy meeting.
Japan’s central bank kept interest rates unchanged and also raised growth prospects for Japan during 2021 through to 2022. The Bank of Japan also noted that they expect “strong demand” after COVID-19.
However, despite the rising of growth expectations the central bank acknowledged that the outlook remains “highly uncertain”. It should be said that the Bank of Japan also downgraded inflationary expectations, moving the central bank further from its 2 percent goal.
The central bank also noted that they “would not hesitate to make additional monetary easing if necessary”. Policy members committed to maintaining short and long-term interest rates at extremely low levels.
Traders reacted by selling the yen broadly, with the Japanese yen notably weakening against the US dollar, Canadian dollar and euro currencies, as they are factoring in more bond buying and low rates from the Bank of Japan.
Markets have also paid close attention to the new COVID-19 lockdowns in Japan, as a state of emergency was declared, which is creating very difficult conditions for yen bulls right now.
Sentiment amongst retail traders has seen another big shift this week, with some 55 percent of traders, which is a big drop from last week whereby 65 percent of traders were bullish.
Based on the current sentiment reading, and if it stays around current levels, I expect a range of between 108.00 to 109.30. However, if bearish sentiment moves above 60 percent, the USDJPY pair could continue to push higher with relatively little pullback.
USDJPY Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the USDJPY pair has turned bullish across multiple time frame after moving above the 108.40 level.
The USDJPY pair has moved above its 200-period moving average on the four-hour time frame, while the Parabolic SAR indicator is also generating a buy signal.
Key support is found at the 108.40 and 108.00 level, while key resistance is found at the 109.30 and 109.90 level. Extended resistance is found at the 110.60 level.
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USDJPY Medium-Term Technical Analysis
The daily time frame shows that the USDJPY pair has moved above the neckline of a large head and shoulders, making the medium-term technical more favourable.
Bulls need to move the price above the 111.00 level to invalidate the bearish price pattern. At the stage, a break under the 108.45 level is required to increase medium-term selling pressure.
Traders should be aware that the USDJPY pair is trading well above its 200-day moving average, so the trend is technically bullish.
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