The Japanese Yen has been witnessing increasing pressure for the last four days as compared to its American counterpart. On Wednesday, Yen dropped to a four-week low, and as a result, the USD/JPY pair dropped to nearly 156.00s. This drop is primarily attributed to Japan’s current financial health under Prime Minister Sanae Takaichi’s expansionary spending policy and political uncertainty before the snap election on 8th February.
In the meantime, traders remain on high alert amidst the possibility of a coordinated Japan-US intervention to stem the JPY’s decrease. Moreover, the gradual policy tightening narrative by the Bank of Japan could assist in further limiting JPY losses. The bets on cutting the interest rates by the US Federal Reserve’s two more times failed in assisting the USD to attract serious buyers.
The break above 156.00 on today’s session occurs after last night’s break above the halfway point of the downward move from 159.13 to 152.06; this is positive for the bullish USD/JPY traders. The Relative Strength Index (14) reading of 66.9 remains below the overbought threshold and reflects a strong though maturing advance.
In addition, the upward strength within the market is slowing down. The Moving Average Convergence Divergence(MACD) histogram is still positive, which indicates that buyers are present in the market. But the MCAD line is hovering near the zero line, giving a weakening signal and loss of control by buyers.
The next move higher will likely have significant resistance around 156.51, which includes the 100-period Simple Moving Average (SMA) at 156.51 on the 4-Hour chart and the 61.8% Fibonacci retracement of the move down from 159.13 to 152.07. A sustained break above this level is needed to change to an upside bias near-term.
A close above may open the door for an advance to the 78.6% retracement of the 159.13 to 152.07 decline, found at 157.62. If this level cannot be overcome, the recovery would be at risk of significant pullbacks. Presently, the USD / JPY is still trading under the downward-sloping 100-period SMA, suggesting that the potential for a move to the upside continues to face major restrictions.
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Considering this situation, traders in the Japanese Yen need to be very careful. The volatility in this market is expected to be high for the foreseeable future. With the USD/JPY approaching resistance at 156.50, chasing the long rally could carry too much risk.
If you are a short-term trader, it is advisable to take profits now. However, if you are not close to your target, wait for a clear breakout before initiating a new trade. If there are indications that Japan and the US will intervene in currency markets or change the monetary policy of the Bank of Japan, the gains could be wiped out in no time.
Therefore, traders should utilize risk management techniques carefully, as well as keep an eye on the possibility that there could be significant downside move(s) until there is a decisive move above key resistance.
