Original Article Credit: VT Markets (https://www.vtmarkets.com/live-updates/after-reaching-153-50-the-us-dollar-weakens-causing-usd-jpy-to-fall-towards-152-85/)
After surging to a recent high of 153.50, the US dollar took a downturn against the Japanese yen, prompting the USD/JPY currency pair to slide toward the 152.85 level. This shift in price reflects both technical and fundamental developments in the currency market, as traders and investors assess interest rate differentials, economic data, central bank policies, and potential intervention risks from Japanese authorities.
This in-depth analysis explores the key factors influencing the USD/JPY exchange rate, detailing why the pair weakened after testing elevated levels and what the outlook may be going forward.
US Dollar Advances Before Weakening
In the first half of this week, the US dollar advanced sharply against the Japanese yen, pushing the USD/JPY pair to a high of 153.50. This movement was largely attributable to:
– Stronger-than-expected US economic data, which underpinned expectations that the Federal Reserve would keep interest rates higher for longer.
– Treasury yields holding firm at elevated levels, with the 10-year US yield reaching around 4.60 percent, reinforcing demand for the greenback.
– Market sentiment becoming more risk-tolerant, diminishing the traditional safe-haven appeal of the Japanese yen.
However, after reaching the 153.50 mark, the dollar pullback began to take hold.
Technical Rejection at Key Resistance Level
A key reason for the reversal in USD/JPY was the strong technical resistance near the 153.50 level. Many market participants view this level as psychologically significant. Several technical indicators suggested overbought conditions, which triggered selling pressure at this resistance zone.
Key technical developments leading to the pullback included:
– Failure to sustain momentum above 153.50, which marked a multi-decade high.
– Bearish divergence observed in the Relative Strength Index (RSI), suggesting waning bullish momentum.
– Short-term moving averages showing signs of flattening, indicating the possibility of a consolidation or correction phase.
Buyers who had entered the market earlier likely began to take profits near these multi-decade resistance levels, contributing to the greenback’s retracement against the yen.
Japanese Yen Gains on Intervention Risk
The Japanese yen benefited from a reversal in sentiment as traders considered the possibility that Japanese authorities might intervene to support their currency. The Ministry of Finance and the Bank of Japan have expressed concern in the past about excessive yen depreciation, particularly when exchange rate movements are erratic or one-sided.
Factors tilting risk sentiment in favor of the yen include:
– Japanese government officials issuing verbal warnings that suggest discomfort with the yen’s rapid depreciation.
– Rising speculation that the Bank of Japan may take action if USD/JPY breaches perceived tolerance levels near 155.00.
– The precedent of past intervention, such as the 2022 market interventions, where Japanese authorities stepped into the currency market to stabilize the yen when USD/JPY soared above 150.00.
As a result, traders grew cautious about pushing the pair higher, leading to a moderate strengthening of the yen and a retreat in USD/JPY.
Federal Reserve’s Policy Outlook Remains Hawkish
Despite the pullback, the fundamental outlook for the US dollar still appears relatively strong in the medium term, largely due to the Federal Reserve’s ongoing commitment to maintaining elevated interest rates.
Factors supporting a hawkish Fed stance:
– Recent economic data from the United States, including labor market figures and inflation readings, continues to remain resilient.
– Inflation remains above the Fed’s 2 percent target, prompting policymakers to keep borrowing costs high to bring inflation under control.
– FOMC members have indicated a “wait-and-see” approach before making any rate cuts, reaffirming that monetary easing is not imminent.
Nevertheless, the currency market is forward-looking, and traders have already
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