The USDJPY currency pair has recently experienced a notable downturn, capturing the attention of traders and analysts alike. The pair has witnessed losses over the past four consecutive trading days, extending into back-to-back weeks of decline. This trend is largely attributed to the strengthening of the Japanese Yen, driven by market sentiment surrounding the Bank of Japan’s monetary policy outlook.
Crucial economic indicators, such as Japan’s January wage growth report revealing a robust 2% increase, doubling that of the previous month, underscore the significance of the labour market in driving inflationary pressures. This development sparked speculation that the Bank of Japan might consider initiating interest rate hikes in the near future, prompting some traders to position themselves for potential rate adjustments as early as March. Concurrently, Japan’s economy showed resilience by avoiding a technical recession, with GDP returning to growth in the final quarter of 2023, a shift from earlier indications of contraction. This could likely boost the Japanese Yen going into the new week. In contrast, the Federal Reserve’s indication of potential rate cuts this year, as highlighted in Fed Chair Powell’s recent testimony, has weighed on the US Dollar, exacerbating the descent of the USDJPY pair to breach a four-week low.
Technical
The USDJPY currency pair has recently undergone a notable shift in its trading dynamics, marked by a pronounced downtrend following its descent below the 100-day moving average. Currently, the pair finds itself confined within defined support and resistance levels at 145.896 and 150.885, respectively.
Technical analysis revealed a period of sideway consolidation within a rectangle pattern at the resistance level, coinciding with overbought conditions as indicated by the Relative Strength Index (RSI). Subsequent selling pressures intensified, triggering a breakdown below the rectangle pattern.
Further analysis utilizing Fibonacci retracement levels illustrates a significant retracement beyond the 61.80% Golden Ratio level, underscoring the prevailing dominance of bearish sentiment in the market. Should bearish pressures persist, a retest of the 145.896 support level appears increasingly probable. Conversely, a resurgence of upside momentum could pivot attention towards the Golden Ratio, potentially serving as a short-term point of interest to the upside.
Summary
The USDJPY’s recent downturn, driven by a resilient Japanese economy and speculation of BoJ rate hikes, underscores the Yen’s strength. Technical analysis shows a breach of key intermediate support represented by the 61.80% Fibonacci Retracement Golden Ratio, with potential for further downside.
Sources: Ministry of Health, Labour and Welfare Japan, Reuters, Dow Jones Newswires, TradingView
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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