- The USD/JPY currency pair rallied a bit Monday as the Japanese yen recovery has stalled.
- At this point, the ¥136 level is an area that a lot of people will pay attention to.
- If we were to break down below there, I think there are multiple areas that we could see buyers jump into.
Divergent Central Banks
The ¥135 level is a large, round, psychologically significiant figure, and therefore will attract quite a bit of attention. Below there, we then have the 50 Day EMA. In other words, there are a lot of different things underneath that could offer support, so I would keep that in mind. The trend has been well ensconced for a while, mainly due to the Federal Reserve entering a tightening cycle over the last several months, and therefore it makes sense that the US dollar would strengthen. Furthermore, the Bank of Japan continues to loosen monetary policy, so therefore it’s like a perfect set of divergent central banks.
The market has a long way to go before he turns around, and even though the Federal Reserve has a meeting on Wednesday, it’s very unlikely that we will see this change anytime soon. The statement will be looked at quite closely, and if it shows the slightest hint of change, that will change the dynamics in this market. However, it’s very likely that Jerome Powell will continue to pay close attention to inflation, meaning that interest rates in America will continue to climb.
The Bank of Japan has shown its willingness to buy “unlimited” government bonds, and it’s probably going to continue to be a situation where the Japanese yen gets beaten up by just about every other currency. The US dollar will continue to see a lot of buying pressure in the long term due to the fact that the Federal Reserve is massively hawkish.
That being said, the market has been very positive for quite some time, so a little bit of a significant pullback could be a healthy thing. In other words, this is a market that continues to be a “buy on the dips” type of situation, so it’s likely that value hunters will continue to be a major influence in this market. That being said, a breakdown below the ¥128 level changes everything.
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