USD/JPY: Gap Closure in Sight
By InvestingLive Analysts (Original article credit to InvestingLive)
The foreign exchange market has seen significant volatility recently, with the USD/JPY pair standing out as one of the most dynamic. As this major currency pair exhibits potential momentum in both technical and fundamental arenas, traders are paying close attention to levels that could influence near-term directional bias. One of the main technical observations currently attracting traders’ attention is the existence of an unfilled gap that could serve as a potential magnet for price movement.
In this analysis, we will delve into the current outlook for the USD/JPY pair, using technical indicators, market sentiment, and price action behavior to understand its recent rally, the positioning of investors, and the possibility of a price correction towards a previous gap.
Recent Movement and Technical Overview
USD/JPY has had a persistent bullish trend, driven by a stronger US dollar thanks to the Federal Reserve’s hawkish stance and a persistently dovish Bank of Japan. The balance between monetary policy expectations on both sides of the Pacific plays a crucial role in influencing USD/JPY price action.
However, the rally has not been linear. We have observed phases of consolidation, breakouts, and minor pullbacks. Amid this behavior, traders are now focused on a notable technical formation: an open price gap from a previous session that has not yet been filled.
Here is a breakdown of the pair’s technical situation:
– USD/JPY experienced a strong breakout to the upside after consolidating for multiple sessions
– During this surge, a price gap was left open on the daily chart, which typically serves as either a support or resistance area in future sessions
– The pair reached a high of 147.00 before starting a modest pullback
– Price action is currently consolidating, suggesting indecision among traders
– The 50-day moving average continues to provide underlying support with buyers entering around key intraday levels
– RSI (Relative Strength Index) has corrected from overbought levels and is hovering around neutral, signaling room for further movement in either direction
Understanding the Gap and Its Implications
In technical analysis, gaps are usually interpreted as areas where price action was so aggressive that it skipped over price levels without establishing support or resistance. Traders often look for these gaps to eventually get filled as a form of market equilibrium returning.
Here is what makes this gap worth watching:
– The price gap occurred around the 145.30–145.50 area
– It was formed during a bullish overnight session, likely due to an increase in speculative buying or fundamental catalysts (such as unexpected US economic data)
– Historical price action has shown that USD/JPY tends to revisit such gaps either due to profit-taking or market correction in the absence of new bullish catalysts
Why Does This Gap Matter?
For both retail and institutional traders, gaps serve as potential targets for short-term reversals or retracements. Additionally:
– Filling the gap may serve as a liquidity pool for large orders
– It can act as a pivot for future bullish or bearish momentum depending on how the pair reacts upon reaching the gap zone
– Institutional players who missed the initial run-up might wait for the pullback to re-enter trades
– A gap fill could encourage short-term selling pressure, even if the broader trend remains intact
Fundamentals Influencing USD/JPY
While the gap is a critical technical factor, there are broader macroeconomic elements at play that will determine whether the pair will reach and potentially fill the aforementioned gap.
Federal Reserve Policy Expectations
– The Fed continues to maintain a hawkish tone, emphasizing the need to keep interest rates elevated to combat inflation
– While markets had priced in cuts in the earlier part of the year, recent data has reshaped that narrative
– Strong employment numbers and resilient consumer spending support high rates for a longer period
– This policy divergence with the Bank of Japan helps to support USD/JPY strength over the long term
Bank of Japan’s Influence
Explore this further here: USD/JPY trading.