USD/JPY – look out below

USD/JPY has reached a vital level, with major consequences if it continues to fall.

Source: Bloomberg

When a central bank hikes interest rates and the currency fails to rally, you know there is something amiss.

Jerome Powell’s first press conference went off without a hitch, indeed the new Federal Reserve (Fed) boss rattled through the press conference, dispatching questions with little of the monetary policy exegesis that characterised his predecessor. But the dollar’s bounce was short-lived against the yen, and we have arrived at a key level for USD/JPY.

At present, it looks like the committee is not keen to hike more than twice this year. This could change; given that the makeup of the committee will develop over the year, more hawkish voters will come on stream, with the possibility that it will be viewed as a ‘four-hike’ year by June 2018 . USD/JPY traders were clearly disappointed that they didn’t get a more hawkish view from Mr. Powell.

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All this comes at a crucial point for USD/JPY. We are at a ‘look out below’ moment, or to use another term, ‘bounce or bust’. The pair has been in a steady downtrend since the first half of 2015, and the September-November 2017 rally was simply a counter-trend move. Now, the price has fallen to its lowest level since October 2016.

The crucial level to watch is ¥105.24. This was the low at the beginning of March, and when it was last hit a short-term bounce developed. However, the recovery was swiftly beaten back. If ¥105.24 is lost, then the pair faces a trap-door that could send it to at least ¥101.19, the next big support level. Below this, ¥100.08 comes into play, and then ¥98.98.

The hope for the bulls is that the weekly chart is now heavily oversold, and that a bounce will materialise. However, any bounce that fails to move above ¥107.31 is still a probable selling opportunity, and even a surge to ¥112.00 would still be constrained by the post-2015 downward trend. This pair bears close watching in the coming days.

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