Furthermore, traders might unwind their carry trades ahead of the BoJ’s policy decision. This would involve selling assets purchased with borrowed Yen, leading to increased demand for the Yen and potentially boosting its value. Japan’s top currency diplomat, Masato Kanda, has highlighted concerns about FX volatility’s impact on the economy, suggesting a cautious approach toward the currency. This caution could influence market sentiment and contribute to a stronger Yen, as the market interprets it as a signal of impending monetary policy adjustments.
Meanwhile, the US Dollar (USD) faces challenges due to expectations of rate cuts by the Federal Reserve (Fed) later in the year, driven by cooling inflation and a softening labour market. This divergence in monetary policy outlooks between the US and Japan could narrow the interest rate differential, making the Yen more attractive relative to the Dollar. As a result, the USD/JPY pair might experience downward pressure, with the Yen potentially appreciating further if the BoJ does proceed with a rate hike and the Fed continues to signal rate cuts.
Long-Term Technical Picture of USD/JPY
Based on the above discussion, fundamental factors indicate that USD/JPY is at a significant point where the BoJ’s decision might trigger a big move. The technical picture suggests a similar situation. The monthly chart below shows the long-term technical outlook for USD/JPY. It shows the pair advancing from a long-term bottom and approaching levels last seen in the 1980s. The long-term technical outlook indicates that the pair has formed symmetrical triangles before significant moves. The symmetrical triangle formed from 1995 to 2007 broke to the downside, leading to a historical low at $75.54 in 2011, followed by a significant increase.
The second symmetrical triangle formed from 2015 to 2020 created a long-term buy signal at $101.25 and initiated a strong price surge. Historical analysis shows this long-term rally began after breaking the long-term downtrend line, highlighted in green. This breakout suggests the long-term direction for the pair is still upward, but the pair is currently trading at a strong resistance point, marked by a grey circle.
Moreover, the pair has been trading within a red arc, which has been a significant resistance during any bull run in the past. Currently, the price is testing a critical resistance area, which could result in a substantial price drop. The RSI indicator also shows similar patterns, indicating the price is currently overbought.
