Risk aversion and the continued selling of the US dollar since the recent US Federal Reserve announcement allowed the bears to push the price of the USD/JPY currency pair towards the support level 129.65, its lowest in nearly two months, before closing trading around the 130.72 level, as the trend remains downward year. In general, the less hawkish FOMC statement and concerns about the US banking sector may curb the gains of the US dollar in the near term, as investors fear a tightening of credit conditions on households and companies, as Powell warned.
The prospect of slower rate hikes may also limit the dollar's gains as this marks a shift from their earlier expectations that aggressive hawkish moves might be justified. US Treasury Secretary Yellen also drew attention to smaller lenders and the possibility of seeing more bank runs, adding that the government was not considering "universal" deposit insurance.
However, more updates highlighting problems in the US financial sector may push investors away from the greenback to the safe-haven Japanese yen, especially since Japan does not appear to be experiencing liquidity problems yet.
US exchange rates were mostly underwater during the last session of last week after the Federal Reserve (Fed) suggested that interest rates could rise less than previously thought once all is said and done, leading some analysts to predict more dips. The dollar will rise in the future. The dollar was broadly bought in European trade on Friday after consumer and banking stocks led stock indices lower around the world while government bonds rose, although a last-minute rebound only pared widespread losses for the week overall.
The losses were the sharpest and broadest after the Federal Reserve raised the federal funds rate range to between 4.75% and 5%, but indicated for the first time in more than a year on Wednesday that the outlook for borrowing costs was now an open question.
For his part, US Central Bank Chairman Jerome Powell said: “Our decision was to go ahead with an increase of 25 basis points and change our guidance, as I mentioned, from “continued hikes” to “some additional hikes” or “it may be appropriate to install additional policy.” "As I mentioned, in assessing the need for further increases, we will, as always, focus on incoming data and evolving projections, and in particular on our assessment of the actual unexpected effects of credit tightening," Powell added.
Chairman Powell noted a significant slowdown in the US economy last year and acknowledged the recent deterioration of very important labor market conditions that are expected to develop further and ultimately help return inflation to the 2% target over the coming years.
Technical analysis of the currency pair
- The price of the USD/JPY currency pair may be on the way of major selling, as the currency pair forms a head and shoulders pattern on its daily timeframe.
- The price has yet to test the neckline around 127.00-128.00, but a break-down could lead to a long-term slippage.
- In particular, the chart pattern extends around 2200 points and thus the resulting breakdown could continue at the same height.
- However, the technical indicators look mixed. Where the 100 SMA recently crossed below the 200 SMA to indicate that the overall trend is still bearish or that the support is more likely to break than hold.
- These moving averages also held as dynamic resistance in the recent decline.
The RSI has some room to head lower before reaching the oversold territory to reflect exhaustion among the sellers. A shift to the upside may indicate a return to bullish pressure. Stochastic is already in the oversold zone showing that selling pressure is fading and bullish momentum may return. This may trigger some consolidation or a bounce higher off nearby support areas.
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