USD/JPY pressured after BOJ and ahead of Fed

16 March, 2016

USD/JPY fell from major resistance on Tuesday after the Bank of Japan (BOJ) opted to keep interest rates on hold instead of cutting rates further into negative territory. While BOJ Governor Haruhiko Kuroda indicated that the central bank may continue implementation of more stimulus measures in future meetings, the statement lacked clarity as to when, or if, that might actually occur. As a result, the yen surged against most other currencies including the dollar, pushing USD/JPY well off its key 114.00 level.

Also contributing to the surge in the Japanese yen on Tuesday was a tentative return to risk aversion as crude oil and global equity markets initially fell early in the day. This general risk-off sentiment helped to further boost the safe-haven yen.

Like the BOJ, the US Federal Reserve is also not expected to change interest rates when it provides its statement on Wednesday after two days of meetings. Unlike the BOJ, however, the Fed is expected to refrain from raising rates, notcutting rates. With most major central banks either on hold or in easing mode, the Fed is conspicuous in its continuing discussion of potential monetary tightening. This may or may not change on Wednesday, as the recent aggressive easing announced by the European Central Bank last week could possibly have some spillover effect on the Fed.

From a technical perspective, after USD/JPY hit a 111.00-area low in early February, the currency pair began a prolonged consolidation near its lows, which at one point in late February retested 111.00 to form a double-bottom chart pattern. Meanwhile, on the higher end of the consolidation, price has formed a descending trend line that has served as the upper border of the trading range. Overall, this upper border combined with the lower horizontal border at the noted 111.00 double-bottom lows have formed a clear descending triangle pattern.

Whether either of these borders is breached during or shortly after Wednesday’s Fed statement remains to be seen. A more-hawkish-than-expected statement could lead to a USD/JPY breakout above the 114.00 resistance level and above the noted triangle to target the next major upside resistance at 116.00. In contrast, a more-dovish-than-expected Fed could lead to a further drop back down towards the 111.00 support level and the bottom of the triangle. Any further breakdown below that level could next target the key 110.00 and then 108.00 support objectives.


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