Japanese Yen Slips A Little, But BoJ Policy Hopes Still Lend Support

Japanese Yen (USD/JPY) Price and Charts

• USD/JPY ticks up again
• However it remains close to two months lows
• Next week’s BoJ policy meet could provide some unusual excitement

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The Japanese Yen drifted lower against the United States Dollar on Thursday but remains close to two-month highs as the market looks with unusual interest toward the Bank of Japan’s next monetary policy meeting on March 19. There are perhaps the clearest ever signs that the central bank could be serious about ending decades of extremely low-interest rates.

The BoJ has stuck to ultra-loose policy settings, even as other central banks ramped up borrowing costs to fight a global wave of inflation. That’s because Japanese authorities have for years been trying to generate some pricing power in the face of moribund domestic demand. Now, it seems, they might have succeeded. Various BoJ policymakers seem better disposed to raising interest rates, or at least considering such a thing.

The latest news on the inflation front is that wage settlements look to be heading higher again. The manufacturing bellwether has reportedly agreed to the highest pay rises for twenty-five years, with peer companies all but bound to follow its lead. This suggests that corporate finance departments sense a more durable recovery.

Earlier this week came news that Japan avoided a technical recession at the start of this year, with Gross Domestic Product growth revised higher. Admittedly growth is hardly stellar, but at least the BoJ won’t be accused of tightening credit in a recessionary environment if it should move.

Of course, the Yen will likely continue as a yield-laggard currency for a long time to come, but the prospect of a major shift at the BoJ will continue to offer it support. The rest of this week’s major USD/JPY economic data cues will come from the US side, with retail sales and consumer sentiment numbers both due before the close of play on Friday.

USD/JPY Technical Analysis

Chart Compiled Using TradingView

USD/JPY has staged a modest bounce in the past week. This was rooted in the fundamentals with the Dollar gaining some ground on a modest expectation beat for US inflation figures on Monday.

However, this hasn’t shifted the dial on US interest rate expectations. Cuts are still expected to start in June. For now, USD/JPY looks stuck in the broad range between the first and second retracement levels of the rise from December’s lows to the three-month peaks of mid-February.

The upside of that range is 148.398, with 146.842 as the lower bound. That latter point has been probed by Dollar bears on three daily occasions in the past two weeks, but even then the market has always closed above it. Below that mark, the 200-day moving average offers further support. It comes in at 146.248 now.

Unless Dollar bulls can regain recent highs, the impression that the current pause is just a break on the road lower is likely to endure. The pair was edging toward oversold conditions after its recent fall, so a break was likely. The market looks to be developing a head and shoulders pattern, the classic top out. This process will bear watching into the next week of trade. It promises to be an interesting one for the Yen.

–By David Cottle for DailyFX