USD/JPY Could Squeeze to 112

USD/JPY Could Squeeze to 112

USD/JPY Could Squeeze to 112

For the first time in more than 2 weeks, USD/JPY traded above 110 and the break was strong. The move was driven entirely by expectations for next week’s Bank of Japan meeting. There are now reports that the BoJ could introduce negative lending rates to complement negative deposit rates. They avoided intervening in the currency market when USD/JPY dipped below 108 because they prefer monetary intervention and their next opportunity to help the economy comes next week. If they ease, it will drive USD/JPY to 112 but the currency pair could extend higher in advance of the meeting as talk of negative lending rates leads to more short covering ahead of BoJ. There could also be profit taking on short dollar positions ahead of FOMC. In light of the recent performance of the U.S. economy, the Federal Reserve is in no position to make any changes to monetary policy. However economic data has taken a turn for the worse with retail sales falling, manufacturing activity slowing and consumer prices growing at a slower pace. Yet nearly all of the Fed presidents feel that the market is underpricing the risk of tightening and they have taken every opportunity to express their view that rates will rise this year. How the language will change in the FOMC statement is unclear, giving investors very good reasons to take profit on short USD/JPY trades.

Technically, now that USD/JPY is trading above the technically and psychologically significant 110 level, the target will be its next level of resistance at 112. Not only was this a former support turned resistance but it is also near the 50-day SMA and 23.6% Fib retracement of the 2015 to 2016 decline.

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