The USD/JPY pair is trading above 161.00 on Thursday, amid the closure of U.S. markets due to a public holiday.
This move comes after the 30-year Japanese sovereign bond sale went very smoothly, while markets were concerned that the government might face allocation problems.
Meanwhile, traders remain worried about the Bank of Japan ending its bond-buying program. Consequently, there is some positive news for the Japanese yen, trading higher against the U.S. dollar.
The yield on the U.S. 10-year Treasury is trading at the lower end of this week’s range, near 4.36%, and I believe it will stay there with U.S. bond markets closed on Thursday for Independence Day. The benchmark 10-year Japanese government bond yield is trading around 1.08%, down from its daily high of 1.097%.
As a result, the U.S. Dollar Index (DXY) took a significant hit last Wednesday due to mixed economic data. The main takeaway from all the data is that almost every data point came in weaker or below consensus, indicating that the U.S. economy is starting to slow down or experiencing a recession that the Fed hopes will be mild.
In my opinion, the USD/JPY pair has retreated from its peak at 161.99, a level not seen since 1986. Traders are closely watching for significant moves in the yen and potential intervention by Japanese authorities to prevent a major decline in its value, making the current period crucial for the pair.
I also think that the yield differentials seem significant for the USD/JPY outlook. Foreign exchange intervention might be imminent due to the weak yen, which is putting downward pressure on consumer confidence.
It’s worth noting that the Nikkei 225 rose to nearly 40,700 points today, following recent gains on Wall Street. The weak yen has bolstered stock markets by enhancing earnings expectations for export-dependent Japanese industries.
Meanwhile, the U.S. dollar faced challenges amid declining U.S. Treasury yields due to weak economic data that bolstered expectations of a rate cut by the Federal Reserve in 2024. In my view, this could negatively impact the USD/JPY pair in the near to medium term.
I should also mention that two government sources have stated that the Japanese Ministry of Finance might issue a new type of floating-rate bond to help investors mitigate risks from rising bond yields. This move comes as Japanese officials prepare for further interest rate hikes by the Bank of Japan.
Federal Reserve Chairman Jerome Powell has shifted to a somewhat hawkish stance. He said that the Fed is returning to a tightening path. However, he wants to see more evidence before cutting interest rates as the U.S. economy and job market remain strong, which could make trading the pair volatile and risky at this time.
Technical analysis of Yen (USD/JPY) prices
The USD/JPY pair is trading above the 161.00 level on Thursday, indicating a bullish bias according to daily chart analysis. The pair is stabilizing near the upper boundary of the ascending channel pattern. However, caution is advised as the 14-day Relative Strength Index (RSI) is above 70, indicating overbought conditions and currently suggesting a deep downward correction.
In the short term, the USD/JPY pair may retest the resistance level at 162.10, the upper boundary of the ascending channel. A breakout above this level could reinforce the bullish trend, potentially pushing the pair towards the robust resistance at 162.50.
On the downside, there is immediate support around the 9-day Exponential Moving Average (EMA) at 160.68. A decline and stabilization below this level today could nullify the bullish outlook, potentially leading to a drop towards the lower boundary of the ascending channel near 158.80. Further declines below this channel support could see the pair move towards the region around the June low of 154.55.
Yen (USD/JPY) – Prices Chart –-XS.com MT4.
In my opinion, the USD/JPY pair still faces the risk of potential intervention by the Japanese Ministry of Finance. However, I believe that if the Bank of Japan announces an interest rate hike, along with scaling back or even completely ending its bond-buying program, markets will abandon the idea of dual intervention. The Japanese yen would then strengthen significantly across the board, yields would rise sharply, and we would see the USD/JPY pair drop to its lowest levels.
With the Relative Strength Index (RSI) now in the overbought territory on the daily chart, the correction appears to be deep. The first major support level is at 160.32. If this level is broken and sustained below, a sharp decline is likely, with the USD/JPY pair potentially moving towards 157.03, which is the 55-day Simple Moving Average (SMA), or the 100-day SMA at 154.26 in the near to medium-term.
Support levels: 160.93 – 160.20 – 158.85
Resistance levels: 161.55 – 162.22 – 162.77
