USD/JPY : Touching Its Highest Levels Amid Central Bank Policy Divergence

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The USD/JPY pair fell during morning trading on Thursday to the 160.4 area, after retracing from its highest level since 1986, amid significant interest rate differentials between the United States and Japan. The Bank of Japan (BoJ) has been hesitant to outline a detailed plan for reducing government bond purchases.

Conversely, recent hawkish comments from Federal Reserve officials indicated that the U.S. central bank is not in a hurry to begin interest rate cuts amid a still resilient economy. This coincides with a fundamental uptrend in global stock markets, weakening the safe-haven Japanese Yen and providing upward support for the USD/JPY pair.

Investors remain cautious, expecting potential Japanese government intervention to support the Yen, as affirmed by Japanese Deputy Finance Minister Masato Kanda, who stated readiness to take appropriate actions against excessive currency fluctuations detrimental to Japan’s economy. Additionally, higher-than-expected retail sales data from Japan, rising by 3% annually in May, offer some support to the Yen and encourage profit-taking on the USD/JPY pair.

The pair may decline due to risk aversion or verbal intervention by Japan, supporting the strength of the Japanese Yen. I believe the focus now will be on potential Japanese government interventions in the currency market and U.S. data. Meanwhile, the Bank of Japan remains unclear on when and how it will reduce its bond-buying program.

At the same time, I believe the U.S. Dollar Index (DXY) has strengthened with support from the weakening Japanese Yen. The other heavyweight currency in the market, the Euro, is also likely to support the Dollar, especially amid increasing uncertainty ahead of early French elections on Sunday and worsening German consumer confidence. Furthermore, 10-year Treasury yields rose to 4.3%, with strong demand evident in the sale of $70 billion in five-year bonds. Despite recent economic data, the Dollar reached its highest level since last November, though this increase seems exaggerated.

In its latest monetary policy meeting, Bank of Japan Governor Kozo Oida stated officials decided to postpone plans to reduce bond purchases and raise interest rates until the July meeting. He also expressed concerns about inflation expectations due to the significant weakness in the Japanese Yen, enabling Japanese exports to compete globally and increasing import costs. This could lead to economic inflation consequences from the weak Japanese Yen, potentially seeing new highs for the USD/JPY pair in the medium term, in my opinion.

Technical Analysis of (USD/JPY) Prices:

Based on the daily chart, any decline in the USD/JPY pair is likely seen as a buying opportunity, targeting the key level of around 160.00. Below that, the pivotal support-turned-resistance now lies at 159.75, below which the pair could extend corrective declines towards strong support at 159.00.

Alternatively, the highest level in decades, around the 160.85-160.90 zone, serves as major resistance. A breakout above this level could target 161.00 and beyond in the medium term.

Based on technical analysis, the USD/JPY pair is biased upwards after surpassing the key resistance at 160.00 for the second time since April 29, reaching a high of 160.32, the highest level this year. This has raised concerns about potential Japanese authorities or the Bank of Japan intervening to halt the Yen’s depreciation.

Currently, momentum remains positive, especially with the Relative Strength Index (RSI) in overbought conditions. The uptrend strength suggests caution in the near term, signalling a possible deeper downside correction.

Key resistance levels to watch next are at 161.00, followed by 162.00, before potentially testing the highest historical level in November 1986 at 164.87, followed by the April peak of 178.

Conversely, if the USD/JPY falls below 160.00, initial support is at the June 24 low of 158.75, followed by major support at 157.82. Further downside targets include supports at 157.53 and 157.24 in the near and medium term.

Support levels: 160.30 – 159.90 – 159.43

Resistance levels: 161.00 – 161.25 – 161.80