Original article by InvestingLive
USD/JPY Looks to Close the Opening Gap as the Session Gets Underway
The USD/JPY currency pair started the trading week by opening with a downside gap, slipping below last Friday’s closing levels. However, early trading has shown signs of recovery, with the pair attempting to close that gap as the session progresses. Several factors are influencing the movement, including market sentiment, upcoming economic data, and central bank policy positions.
Current Market Overview
– The USD/JPY opened lower this week, caused by renewed concerns over global economic growth and shifts in risk sentiment.
– The initial gap was attributed to caution in the equity markets across Asia and Europe following geopolitical risks and disappointing macroeconomic data over the weekend.
– At the open, the pair dropped below the psychologically significant 145.00 level but quickly found intraday support.
– Traders and investors are now watching to see whether the pair will fully recover from the opening gap and resume the prevailing uptrend that characterized recent sessions.
Technical Analysis Highlights
Technical indicators suggest a complex picture for the USD/JPY pair:
– The Relative Strength Index (RSI) currently trades near the neutral 50 mark, reflecting a balance between buying and selling momentum.
– Support is clearly defined near the 144.80 level, which has acted as a critical floor on the hourly and four-hour charts.
– Resistance comes into play around the 145.60 mark, an area that previously saw selling pressure.
– A move through this resistance could open the door for a rally back toward 146.20 and potentially test multi-month highs.
Despite the recent dip, the broader trend remains tilted in favor of the US dollar, largely because of diverging policy trajectories between the Federal Reserve and the Bank of Japan.
Fundamental Drivers of USD/JPY Price Action
Several key macroeconomic and monetary policy themes have been influencing the USD/JPY exchange rate:
Federal Reserve Policy Stance
– The Federal Reserve has remained hawkish, emphasizing that rates may stay elevated for longer if inflation fails to fall back to its 2% target.
– US economic data, including labor market reports and core inflation figures, have pointed to continued resilience, providing the Fed cover to hold a restrictive monetary policy.
– Treasury yields have remained well-supported, particularly the yield on the 10-year note, helping to boost the US dollar and support USD/JPY.
Bank of Japan’s Ultra-Loose Monetary Policy
– In contrast, the Bank of Japan continues to pursue an ultra-accommodative policy, keeping short-term interest rates around -0.1% and maintaining yield curve control.
– While inflation in Japan has shown signs of firming, the Bank of Japan argues that sustained wage growth and stronger demand are still needed before tightening policy.
– Governor Kazuo Ueda’s recent comments highlighted the BOJ’s cautious stance and noted that any policy normalization would be gradual.
Interest Rate Differentials
– The wide gap between US and Japanese short-term yields continues to make the US dollar attractive relative to the yen.
– This yield differential underpins carry trade strategies where investors borrow in yen and invest in higher-yielding US assets.
Market Sentiment and Risk Appetite
– The USD/JPY is also highly sensitive to changes in global risk sentiment, as the Japanese yen acts as a traditional safe haven.
– Geopolitical risks in Eastern Europe and China’s uneven post-pandemic recovery have increased investor caution.
– When risk appetite deteriorates, demand for the yen tends to rise, leading to USD/JPY declines.
– On the flip side, periods of stable equity markets and economic optimism push investors back toward the US dollar, driving the pair higher.
Economic Data to Watch This Week
This week brings a slate of economic indicators that could impact the USD/JPY trajectory:
From the US
– ISM Services PMI: Set to provide insight into the health of the US service sector, a major portion of GDP. A stronger-than-expected reading could strengthen the dollar
Explore this further here: USD/JPY trading.