Blackwell Global

Key Points:

• Technical bias signals a reversal could be on the cards.
• BoJ announcements are the key risk event to keep in mind.
• An upwards revision of GDP forecasts could spark a slip.

In light of the fact that the BoJ is going to be thrusting the yen centre stage in the next 24 hours as a result of its interest rate announcement, it’s worth taking a closer look at the USD/JPY and what is likely to be on cards moving ahead. In particular, we should be cognisant of the current technical bias and how it will influence the pair’s performance given the expectations of the BoJ’s impending reports.

Starting with our technical bias, there is a fairly clear picture being painted on the daily chart which suggests a reversal to the downside is warranted. Specifically, even given the sizable rally seen in the prior session, buying pressure failed to push the pair above the 100 day moving average which provides a strong indication that we may have reached a near-term peak. Moreover, both the 12 and 20 day averages are in a bearish configuration which can only add to downside risks for the day to come.

Furthermore, if we take a closer look at some other technical instruments, the likelihood of an imminent slip seems rather substantial. For one, the zone of resistance that the dollar yen is currently struggling against falls in line with the 50.0% Fibonacci retracement which is acting as an effective cap on additional gains. In addition to this, the stochastics are moving into oversold territory which suggests that the bulls are exhausted and about to be slapped lower.

From a fundamental perspective, it may be somewhat counterintuitive to expect the yen to strengthen materially against the USD given the likely content of the BoJ’s policy statement and outlook report. The widely recognised inability of the bank to hit its 2% inflation target will almost certainly be reinforced by the releases which should lead to some modest selling, even though much of this negative sentiment has already been priced in. However, what will likely be of greater interest will be the BoJ’s GDP forecast for the coming fiscal year. Indeed, the 1.5% forecast is expected to be revised upwards, in line with the IMF and OECD revisions seen earlier in the year.

In the event we do see a GDP forecast in excess of 1.5%, buying pressure for the yen should kick in which will drag the USD/JPY lower in agreement with the already discussed technical bias. As a result, losses could see the pair as low as 106.86 within a few weeks as the next stage of the descending channel takes hold. Alternatively, if the forecast remains grim, we could see a near-term spike which could bring the pair to the upside of the channel before long-term bearishness resumes.

Ultimately, the outcome of the impending session is likely to come down to what the market weights more heavily out of the inflation or GDP expectations. However, at present, it appears that the GDP data is going to be the only new information injected into the situation which would usually make it the preeminent risk event for the day.