The USDJPY pair witnessed a significant surge of more than 2% following the announcement made by the Bank of Japan’s deputy governor. The statement indicated a decrease in the likelihood of immediate policy tightening due to market instability concerns. This shift in sentiment attracted buyers back to the Japanese markets, leading to a 4% rebound in USDJPY from the recent lows.
Interestingly, speculators were initially unimpressed by the Bank of Japan’s rate hike from 0.1% to 0.25%. In fact, the yen depreciated by approximately 0.6% within the first hour after the decision. This divergence in reaction triggered an unwinding of the carry trade, resulting in market pressure at the beginning of the week.
Both Japan and the US are in the process of normalizing interest rates. Japan has maintained inflation close to the 2% target for nearly two years, enabling the central bank to transition from a zero-interest-rate environment. Conversely, the Federal Reserve is facing challenges such as decelerating price growth and a subdued labor market, necessitating a move towards a long-term average rate of 2.8%.
From a technical standpoint, the recent uptrend in USDJPY appears to be a corrective bounce from oversold conditions. The Relative Strength Index (RSI) on the daily chart plummeted to 13, a level not seen since 1997 and 1995. Historical patterns indicate that previous bounces from such extremes were followed by renewed bearish momentum and further downside movement before a sustainable reversal occurred.
While there is a possibility of USDJPY retracing towards the 149.50 level, corresponding to the 61.8% Fibonacci retracement level, historical precedent suggests that the markets have preferred shallower pullbacks towards the 76.4% level near 146.5. The 146.0-146.5 zone, which previously served as support, could now act as a formidable resistance barrier, potentially impeding further upside potential in the pair. However, a bullish scenario may materialize if USDJPY manages to breach the 149.50 mark in the near future or surpass the 200-day moving average at 151.60, signaling a reversal of the recent downtrend triggered by the Bank of Japan’s interest rate hike decision.