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Japanese Yen Price Action Setups: USD/JPY, EUR/JPY, GBP/JPY

Japanese Yen Price Action Setups: USD/JPY, EUR/JPY, GBP/JPY

James Stanley, Contributor
What's on this page

Japanese Yen Talking Points:

  • Yen strength has been the rage since last night’s Bank of Japan rate decision. While the BoJ didn’t hike rates, they did widen the band of rates for JGB purchases which was unexpected.
  • This created further unwind of the Yen carry trade that drove for so long during 2022 trade but the big question now is one of continuation potential.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

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The Bank of Japan sent a shockwave through markets last night when making an unexpected change to their bond buying policy. They didn’t adjust rates, but they did widen the band of rates for Japanese Government Bonds that they can buy. Coming into last night’s BoJ rate decision, that band was set for -0.25%-0.25% and last night the BoJ widened that on each side to a new range of -0.5%-0.5%. This might seem a subtle change but, it’s change, and it’s one of the first changes in Japanese policy that’s been seen during this cycle.

Even as much of the rest of the world was lifting rates in 2022, the Bank of Japan was unmoored for much of the year, watching all of the Fed, BoE and ECB lift rates aggressively to tackle inflation. And while inflation didn’t flare in Japan like it did elsewhere, it has begun to elevate more recently. Kuroda’s term ends in April so the wide speculation was that any changes may have to wait for his successor, but as he showed last night he still has his penchant for surprises.

Japanese inflation hit a four decade high last month so this probably is playing into Kuroda’s motivation even as his tenure comes to an end early next year. And while this wasn’t a rate hike that changes swap or rollover values, it is a change – and something of that nature can be read as a possible deterrent to the same trends of Yen-weakness that were driving so prominently earlier this year.

USD/JPY

USD/JPY was riding along the 200 day moving average until last night’s announcement. This begs the question of bigger-picture trend change in the pair. USD/JPY broke above the 200 day back in February of 2021 and price continued to rally above that level until early-December. And then after riding that moving average for a couple of weeks, sellers slammed it down last night to set a fresh four month low.

From the daily chart below, we can see the breakdown from that 200 DMA with price putting in a bounce after crossing support at prior resistance around 131.25.

USD/JPY Daily Price Chart

image1.png

Chart prepared by James Stanley; USD/JPY on Tradingview

USD/JPY Shorter-Term

When we get a major move such as what’s priced-in over the past day in USD/JPY, the natural next question is whether it can continue. Given that the move from the BoJ wasn’t pushing rates, the follow-through here remains of question as it seems that the bulk of this move, at this point, has bene longs unloading which furthers a theme that’s been showing since USD/JPY set its high in October.

As US rates declined, so did motive for carry trades which led to unwind in USD/JPY. Now that there’s the possibility of change in Japanese policy, there was more motivation for unloading carry which helps to explain the extreme nature of the move.

The big question now is whether that will lead to more Yen-buying? The carry does remain tilted to the long side on USD/JPY given the divergence in rates between the two economies. But, if the prospect of principal losses outweighs the potential payout of the carry, well there’s little incentive for bulls to jump in. But, once it finds support that dynamic may change.

We aren’t there yet as the sell-off is still fresh and there may be more unwind to be seen. This can put focus on the psychological level of 130 to see if bulls show some element of response there if/when it comes into play. Below that, the 127.27 level is confluent with a psychological level at 127.50. That’s a big spot as that’s the half-way point of the 2021-2022 major move.

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USD/JPY Weekly Chart

image2.png

Chart prepared by James Stanley; USD/JPY on Tradingview

EUR/JPY

For those looking for longer-term scenarios to prey on Yen-strength, EUR/JPY or GBP/JPY may be more attractive, largely on the basis of weakness in the underlying economies. That’s not to say that the U.S. is immune but, at this point, it does seem as though the Fed may have more room to hike than what might be seen in Europe or the UK.

EUR/JPY has spent much of this year consolidating in the form of a rising wedge. Rising wedges are often approached with the aim of bearish reversal potential and last night’s move just sent price through the support side of the formation.

EUR/JPY Weekly Price Chart

image3.png

Chart prepared by James Stanley; EUR/JPY on Tradingview

EUR/JPY Shorter-Term

The rising wedge break does open the possibility of further downside in the pair. At this point, price is pushing back for another test of the 140 psychological level which is currently confluent with the 200 day moving average. Above that, there’s a prior price swing at 140.88 that remains of interest for lower-high resistance.

EUR/JPY Four-Hour Price Chart

image4.png

Chart prepared by James Stanley; EUR/JPY on Tradingview

GBP/JPY

The bearish side of GBP/JPY is one of my Top Trades for Q1 of next year and price has already traded through my first target at the 159.74 swing low.

GBP/JPY is now bouncing back-above the 160.00 handle, making for a tough backdrop to line up short-term setups on either side of the dragon.

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GBP/JPY Daily Chart

image5.png

Chart prepared by James Stanley; GBP/JPY on Tradingview

GBP/JPY Shorter-Term

With price bouncing back above 160 the big question is for how long the run might last. I’m tracking a Fibonacci level at 160.49 that remains of interest but that’s very close to current price. There’s a price action swing a little higher, around 161.47 and then about 100 pips above that is another level of note at the psychological level of 162.50. Subsequent pushes back-below 160 would indicate that bears are making another push.

GBP/JPY 30-Minute Chart

image6.png

Chart prepared by James Stanley; GBP/JPY on Tradingview

--- Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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