The USD/JPY recent rally has paused as investors continue to watch the performance of the bond market and the upcoming review by the Bank of Japan (BOJ). The pair is trading at 109.20, where it has been for the past few days.
Japan has responded to the pandemic well
The Japanese economy has been relatively resilient during the coronavirus pandemic. While the country’s economy contracted by 5% in 2020, it has started to make strides towards recovery. The economy expanded by more than 12% in the fourth quarter, the second straight month of expansion.
The unemployment rate has remained below 3%, which is commendable considering that in the United States and Europe, the rate is above 6%. Recent data has also revealed that the country’s manufacturing and services sectors have started to rebound.
This performance is mostly because of the actions of the government and the Bank of Japan. The government has already provided a stimulus package worth trillions of dollars to support the economy. That has pushed the overall national debt to significantly above the GDP. Also, unlike in many countries, the government did not announce large-scale lockdowns. Instead, it declared states of emergencies that were relatively effective.
BOJ review and decision ahead
Meanwhile, the BOJ also extended its Global Financial Crisis (GFC) response tools. It has left interest rates in the negative zone since 2013. It also expanded its quantitative easing policies that have led to a significant expansion of the balance sheet.
For one, the bank’s total assets are more than double the country’s GDP. Also, because of its stock purchases, the bank now owns about 7% of all stocks listed in the country.
Therefore, this week’s monetary policy meeting will have an impact on the USD/JPY because the bank will deliver its biggest review in five years. In it, the bank will likely explain some of the measures it intends to pursue going forward.
For example, the BOJ will likely outline when it starts winding down its asset purchases. It could use a route where it will start buying assets only when it is appropriate such as when there is volatility.
Further, the bank will possibly talk about its yield-curve control program. In this program, the BOJ has put in place a target for the ten-year yield at -0.1%. Analysts expect that the bank will tweak this policy as bond yields soar abroad.
Before the BOJ decision, the USD/JPY will react to the Fed verdict that will come on Wednesday evening. According to the Fed’s forward guidance, interest rates will remain at the current level for a few more years. It will also continue with its asset purchases program. However, analysts expect Jerome Powell to talk about the recent performance of the bond market, where the ten-year has jumped to 1.64%.
USD/JPY technical outlook
The USD/JPY has been in a strong upward trend in the past few weeks. However, it has faced some resistance near the highest level since June last year. The price is also between the pivot point and the first resistance of the standard pivot points.
The three lines of the Bollinger Bands have also narrowed while the Average True Range (ATR) has declined, which shows that volatility has declined. Therefore, in the near term, the pair will likely break-out in either direction, either after the Fed or BOJ decision. If it breaks-out higher, the pair will likely rally to 110. On the other hand, if it breaks-out lower, it will retest the support at 108.50.
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