Dovish BoJ Inspires USD/JPY Rally, 200-Day MA in Sight

USD/JPY PRICES, CHARTS AND ANALYSIS:

Most Read: Japanese Yen Drops as BOJ Keeps Policy Settings Unchanged: Where to for USD/JPY?

USD/JPY FUNDAMENTAL BACKDROP

The Yen suffered overnight as comments from Bank of Japan (BoJ) Governor Kazuo Ueda following hist first monetary policy meeting struck a dovish tone. USD/JPY rallied higher in the Asian session from a low around 133.30 to a European session high (at the time of writing) of 135.85.

All eyes were focused on BoJ Governor Ueda in his first monetary policy meeting with many market participants hoping for a pivot or a more hawkish rhetoric. Instead, they got some mixed messaging and indecision as well as an announcement that the Yield Curve Control (YCC) Policy will remain unchanged. This in stark contrast to the announcement of the removal of forward guidance which basically pledged to keep interest rates at current or lower levels. The Central Bank also announced an 18-month long review of how it has conducted its monetary policy. The mixed messaging for me mostly emanated from comments that BoJ may alter monetary policy during the 18-month review period while at the same time stating that will not hesitate to ease monetary policy further if needed. On the whole though a relatively dovish stance by the BoJ but not entirely unexpected to me at least. (For more information download my Free Q2 Forecast for the US Dollar, Japanese Yen and USD/JPY in particular, CLICK HERE)

Following the comments, the Yen faces dovish prospects in the short term coupled with a continued recovery in sentiment following a week of positive US earnings for big tech companies. Yesterday’s US GDP data came in mixed yet unable to deter sentiment either as concerns around sluggish growth and stubborn inflation, which remains elevated. The increasing perception that the Fed may need to keep interest rates higher for longer is likely to offer the US Dollar some support in the interim. Of course, the inflation picture may be a bit clearer later in the day as we have US Core PCE data due (Federal Reserves preferred inflation gauge) which could shed some light on the stickiness of US inflation.

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FINAL THOUGHTS AND TECHNICAL OUTLOOK

Looking ahead whether the current move has the legs to continue remains to be seen. The key factors will obviously be todays US PCE data with a 4.5% forecast for the YoY. A figure of 4.6% or higher is likely to offer the dollar support heading into the weekend and could see USDJPY push above 136.50 and beyond.

From a technical perspective, USD/JPY has printed a fresh higher high today on the daily chart below with the chance of a pullback/retracement increasing. Price is currently breaking above a key resistance area around the 135.70-136.00 level while at the same time attempting to break out of its recent channel. A daily candle close above the 136.00 mark brings the 200-day MA and March high into the play around the 137.00 and 138.00 handles respectively.

USD/JPY Daily Chart – April 28, 2023

Source: TradingView, Chart Created by Zain Vawda

My slight apprehension at this stage regarding a bullish continuation is the fact that the daily price action has just printed a higher high as mentioned above. This coupled with the fact that the RSI on the H4 timeframe below is in overbought territory. The current H4 candlestick may provide some clarity once it closes, as a close above the channel could see price make a run for the 137.00 handle and the 200-day MA (mentioned above).

Alternatively, a H4 close back inside the channel could see a retracement for the pair following the expansive rally to the upside. A push to the downside faces support at the 135.00 and 134.50 levels respectively with a candle close below the 133.50 invalidating the bullish trend.

USD/JPY Four-Hour Chart – April 28, 2023

Source: TradingView, Chart Created by Zain Vawda

Written by: Zain Vawda, Markets Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda