USD/JPY Reverses Lower To Erase BoJ Inspired Gains

The Bank of Japan kept monetary policy unchanged and pushed back inflation targets for the sixth time which was largely expected. USD/JPY gained as the BoJ meeting confirmed that the central bank is likely to be the last to scale back its stimulus program among the major economies. However, gains were not sustained as a combination of selling pressure in the greenback and US equities led to a reversal to wipe early day gains.

The dollar lost ground as a result of a rise in the euro on the back of today’s ECB meeting. President Draghi warned the ECB will be patient in waiting for wages and prices to rise and that the last thing the Bank wants to do is tighten prematurely, putting the recovery at risk. His comments did not deter EUR/USD bulls and a rally today shows the exchange rate approaching multi-year highs while the trade-weighted dollar index (DXY) declined to a fresh 10-month low.

The S&P 500 opened on a stronger note with a gap higher but fell under pressure shortly after the open with a decline from around 2,475 to a low of 2,468. The index has recovered a bulk of the early day loss. Although the drop in the US equity index carried a correlated decline in USD/JPY, the pair was unable to recover on the back of the equity index recovery.

Out of the United States today, weekly unemployment claims improved to 233,000 to beat an expected 245,000 claims. Last weeks figure was revised slightly higher to 248,000 from the originally reported 247,000.

The economic calendar does not contain any further US or Japanese releases for the remainder of the week, however, Canadian data scheduled for Friday stands to have an impact on USD/JPY.

CPI and retail sales data will be released by Statistics Canada at 08:30 on Friday. Currently, an inverse head and shoulders pattern is in play in CAD/JPY. The pattern began forming in late 2015 and is widely watched. The pair has been consolidating at the neckline for over a week. A bullish loonie reaction stands to trigger a neckline break which would have bullish repercussions for all of the yen pairs.

USD/JPY has been battling the 200-period daily moving average over three sessions. Evidence of buying pressure was seen on a test of the indicator over the last two sessions but today’s drop shows the pair falling slightly below it as of the European close. A sustained break below stands to accompany bearish near-term pressure with the next major area of support falling about a 100 points lower, at 110.61.

The 200 DMA also carries confluence with a horizontal level at 111.72 which had held the pair higher on several attempts in February. The daily close will be important in assessing a technical break.

On a 4-hour chart, the currency pair pushed above a declining trendline from last week’s high prior to turning lower. The fake upside break is likely to have trapped some bulls. A declining trend channel shows upside resistance near a horizontal level at 112.08.

USD/JPY Daily & 4-Hour Chart

USDJPY Daily 4H July 20

Jignesh is an analyst and trader, specializing in currencies and commodities. He utilizes a macro view as well as a proprietary method of pattern recognition that is based on the principles of Elliott wave. His focus is to assess strength in trends, and perceiving high potential turning points in the markets. He brings over 4 years of experience in his current role.