Japanese yen weakness drives: USD/JPY EUR/JPY GBP/JPY

Japanese Yen Talking Points:

• USD/JPY has just printed its sixth consecutive week of gains on the weekly chart, begging the question as to whether Yen-weakness is back or whether we’re seeing a pullback in a larger theme of Yen-strength.
• The relationship with rates can keep JPY in the spotlight for FX traders, as the Bank of Japan remains one of the most loose and passive Central Banks in the world.
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It was a strong showing in USD/JPY since the 2021 open and in many ways, we’re still dealing with the effects of the pair’s breakout to fresh 32-year-highs. As US rates were shooting higher for the first nine months of last year, USD/JPY ran higher as driven by that growing interest rate discrepancy. As the Bank of Japan remained loose and passive even as the Fed was hiking rates in effort of stemming inflation, the carry or rollover on the long side of the pair continued to increase, as well. And as other traders were following that increasing carry as brought upon by greater rate divergence, the USD/JPY bullish trend remained hot for much of the first three quarters of 2022 trade. When carry trades are being priced-in, this can lead to trend continuation as more traders come into the market to capture the new, higher rate of return. This article on Forex.com discussed that premise back in May of last year, entitled, Back from the dead? The revival of the FX carry trade.

The big question soon became: When would the Bank of Japan shift into a more-hawkish state? There were some possible indications of change, such as the policy review towards the end of last year. And Japanese inflation was continuing to increase, and still has through early-2023 trade, which points towards a possible moderation of the bank’s dovishness that hasn’t yet come to fruition. In April there’s an expected leadership change atop the bank as BoJ Governor Haruhiko Kuroda’s term concludes. It was long thought, or perhaps feared, that his successor wouldn’t be as dovish as he was. But with the appointment of Kazuo Ueda, Yen-weakness re-appeared and his initial comments on the matter of monetary policy don’t appear to be as disruptive as markets may have feared.

On the below weekly chart of USD/JPY, we can see that dynamic playing out with a trend that began in early-2021 trade and ran until finally setting a high in October of last year. And then in three short months, 50% of that move was wiped out with USD/JPY finding support at the 127.27 level that marks the half-way point of that major move.

USD/JPY Weekly Price Chart

USD/JPY: Six Weeks of Gains Since Support

Last week was the sixth consecutive week of gains for USD/JPY from the weekly chart, begging the question as to whether the sell-off is over and whether the bullish trend is on its way back. From a fundamental point of view, there could be some hindrances to that scenario, especially given the inflation dichotomy as inflation in Japan has continued to move-higher. From comments of Ueda, it appears that BoJ members think inflation may have topped but it hasn’t yet shown in the data. There’s also the matter of Yield Curve Control and the Bank of Japan’s bond buying activities to support that policy.

But, from the technical chart the move has been clear as bulls have continued to push higher-highs and higher-lows on the daily chart over the past month. This included a breakout at a major psychological level of 135, with a bullish engulf printing on Friday after that price had shown multiple bouts of resistance earlier in the week.

This keeps the door open for intermediate-term bullish trends, and that spot of prior resistance is now support potential. Below 135 is another level of note, at 134.45 which was a swing-low turned resistance. Collectively those two prices can be used to establish a zone of interest for support potential. Below that, the 38.2% Fibonacci retracement of the major move referenced above comes into the matter, plotted at 133.09.

Above current price action, there’s another spot of support-turned-resistance around the 138.00 handle, after which the 140 psychological level looms large and is nearby the 140.30 Fibonacci level, which creates a resistance zone atop current price action.

USD/JPY Daily Price Chart

EUR/JPY

As USD-strength has started to re-appear as illustrated by DXY, Euro-weakness has played a role, as well. But, as illustrated by the EUR/JPY chart below, that Euro weakness hasn’t been able to keep up with Yen-weakness.

EUR/JPY is testing a breakout this morning at the 61.8% Fibonacci retracement of the Q4 pullback move, spanning from the October high down to the January low. This is at fresh two-month highs in the pair, with next resistance a little higher from 145.64-145.80.

EUR/JPY Daily Chart

Chart prepared by James Stanley, EUR/JPY on Tradingview

GBP/JPY

GBP/JPY is similarly trading at a fresh two-month-high today, testing above the 50% mark of the October-January major move. Taking a step back on the GBP/JPY chart highlights a key level just above current price action, as taken from a Fibonacci level from a long-term major move around the 165.75 level. From the monthly chart below, we can see a number of inflections at that spot last year before bulls went for the breakout at 170, which couldn’t hold as prices pared back in Q4.

GBP/JPY Monthly Chart

GBP/JPY Shorter-Term

On a shorter-term basis, that Fibonacci level at 165.75 is confluent with another Fibonacci level, as taken from the 61.8% retracement of the October-January major move. This sets out the next spot of resistance as the current breakout attempts to take hold.

At this point, near-term price action is attempting to breakout from the 50% marker of the three-month-sell-off. If sellers come into hold the highs below this level today, the door could remain open for short-term pullbacks. On the near-term support side of the equation, the 38.2% retracement of that major move is confluent with a prior spot of swing resistance, taken from around the 161.77 level.

GBP/JPY Daily Chart

--- written by James Stanley, Senior Strategist

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