No surprises on a lazy Friday. In today’s Monetary Policy announcement, Bank of Japan opted to keep current pace of easing – by expanding monetary base by 60 – 70 Trillion Yen each year. This is a huge disappointment for traders and speculators alike who were hoping for a show of strength by BOJ to restore market confidence following the hike in Sales Tax earlier this week. Instead, BOJ’s statement was filled with the usual dross – moderate economic recovery expected, CPI seen rising, uncertainties remain – which the market already knew and could see for themselves.
The only marginally new revelation is that easing will continue until the 2% inflation is “stable”, and not plugged once we’ve reach the target. This has been implied in the past when Kuroda et al mentioned that 2% inflation is not the actual target, with economic recovery the key goal of Abenomics. Nonetheless, this is the first time they have officially mention that the stimulus plan will carry on for some time more which is good news for Yen bears and Nikkei 225 bulls.
From a technical perspective, prices looks bearish with 97.3 resistance holding. However, the fact that USD/JPY did not drop on a disappointing BOJ announcement is a good indication that underlying sentiment is still rather bullish. This is affirmed by Stochastic readings which is still pointing higher in the midst of a bullish corrective cycle. Hence, a retest of 97.3 may still be possible from here but it is still unlikely that the resistance will break especially given the weakness in USD due to the Debt Ceiling and US Government Shutdown crisis.
Daily Chart is actually flat if we look at price action from June to now. Prices has traded mostly within a 500 pips range from 96.0 to 101.0. Given this technical backdrop, the likelihood of prices rebounding off 97.0 round figure and soft support increases as it is clear that the trading range has been tightening on both ends. This possibility is corroborated by Stochastic readings which are within the Oversold region and looks likely to reverse higher. Furthermore, 97.0 is the confluence with the structural trendline right now, providing further support against a push below 97.0.
This is even more true when we consider that the recent USD weakness resulting from the Debt Crisis and Government Shutdown political impasse may be over soon, which will lead to a short-term USD strengthening scenario even before we take into account the QE tapering impact on long-term USD strength. Hence all these favor a rebound of USD/JPY eventually and short USD/JPY traders will need to be careful of sudden bullish pullback especially since the House may resolve all the issues as early as this weekend. Nonetheless, it should also be noted that immediate momentum remains on the downside, and traders should realize that bearish momentum may still drag us lower below 97.0 temporary before stronger recovery can take place. Do not take anything for granted when volatility is high.
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