At the beginning of this week's trading, the Japanese yen strengthened after the head of the Bank of Japan indicated that Tokyo may abandon the negative real interest rate policy (NIRP), a move that may lead to the normalization of monetary policy. Accordingly, the price of the currency pair of the US dollar against the Japanese yen USD/JPY was exposed to a downward price gap that reached the support level of 145.90. In last Friday's session the ascending path was tested against it at the resistance level of 147.78.
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Japan has seen meager growth for decades, despite being the third largest economy in the world. With the yen performing as one of the worst performing currencies in the world, could this change things?
Speaking in an interview with the local Yomiuri newspaper over the weekend, Bank of Japan Governor Kazuo Ueda said the Bank of Japan could drop the negative interest rate policy target when the country achieves its 2% inflation target. And it is possible that this decision will be made by the end of the year. He added by saying: "Once we are convinced that Japan will witness continuous increases in inflation accompanied by wage growth, there are various options we can take."
At the same time, like other global central banks, Ueda pointed out that there should be enough evidence of inflation remaining sustainably at around 2%. Ueda added: "While Japan is showing emerging positive signs, the achievement of our goal is not on the horizon yet."
For years, the Bank of Japan has kept short-term interest rates at about -0.1% below the negative interest rate policy. In addition, the Bank of Japan tried to keep the ten-year government bond yield at around 0%. The Japanese yen was one of the worst performing currencies among advanced economies this year, falling by approximately 12% against the US dollar.
Unsurprisingly, this news will send the Japanese yen higher and yields higher as well. After the tough comments, the yield on Japanese 10-year bonds rose to its highest level in nearly a decade. It has exceeded 0.7% for the first time since 2014, and the exchange rates are trending higher as well.
Expectations of the dollar against the Japanese yen:
- Although it has been trading bullish in recent weeks, there are signs that the USD/JPY exchange rate may be reversing.
- More precisely, two bearish patterns indicated a possible reversal before the end of last week.
- One of them was a rising wedge, still in progress.
- The rising pegs indicate a reversal as the market continues to form higher peaks but only marginally.
- Once it breaks below the lower trend line, the downward pressure should intensify.
There was also a bearish divergence with the RSI, which has been visible for some time now. The oscillator did not confirm the recent highs. Thus, the bias was bearish even before Ueda's comments. In general, the road should be bumpy for JPY bulls. The gaps tend to close, and this gap is likely to close as well. However, it depends on the timing of the market closing the gap. Due to the fact that American inflation and the Federal Reserve Bank's decision are scheduled to be issued in the coming days, the gap may remain more open than usual and the upward trend of the dollar-JPY currency pair remains.
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