The USD/JPY currency pair did very little Wednesday as we continue to levitate at high levels. This is a market that has been very bullish for some time, so it’s not a huge surprise to see that the market needed to take a bit of a break. We pulled back during the previous session, and then on Wednesday we simply killed that time. The hammer from the Tuesday session is very bullish looking, but we have not broken above it significantly enough to suggest that fresh money has come back into the market.
Furthermore, the US dollar did take a little bit of a hit during the trading session, as we have seen other currencies do quite well against it. Because of this, I think you have to look at this through the prism of a market that is trying to work off some froth because quite frankly this is a market that has been straight up in the air for a while. I don’t believe that the market is suddenly going to change its tune, at least not unless the Bank of Japan changes what it’s going to do.
There is a slight argument for the Bank of Japan to start tightening monetary policy due to the fact that inflation has suddenly shown up in Japan for the first time in 40 years, but the reality is that the Bank of Japan is not going to do anything. Furthermore, inflation for the first time in 40 years is something that the central bank is probably somewhat suspicious of because any whiff of inflation over the last several decades has been wiped out rather quickly.
The ¥3600 level should be a significant floor in this market even if we do break down. More likely than not, we will probably rally and go looking to reach the ¥140 level, although it might be more of a grind higher than anything else as we continue to see a lot of back-and-forth action in multiple currency pairs. With this, I think it’s probably only a matter of time before you reach that crucial ¥140 level, and then break through it to continue the overall uptrend. This will be especially true if the Federal Reserve still sounds very hawkish after the meeting next week.
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