Japanese yen may strengthen before the Bank of Japan meeting

24 July 2023 178
Japanese yen may strengthen before the Bank of Japan meeting

The USDJPY pair has been volatile during the last couple of weeks. Such activity is related to the potential change in the regulator's sentiment at the upcoming Bank of Japan (BOJ) meeting this Friday and the decline in the dollar index.

The regulator will keep the rate at -0.1%. Everything seemed stable, the rate has remained unchanged since 2016. However, inflationary pressures in the country persist because of the commitment to stimulus.

The BOJ faces the prospect of sustained inflation, which increases the reasons to adjust the regulator's actions.

Economists at UBS and BNP Paribas suppose that hints of a policy change may be voiced at the upcoming meeting. The BOJ is expected to raise its inflation forecast for this fiscal year from the current level of 1.8%.

Economic data continues to signal the formation of an inflationary cycle. This month the market indicator of long-term price expectations reached its highest level since 2014. The core wage indicator rose at the fastest pace since the 1990s.

Given that the Fed is going to stop policy tightening soon, we may see a strengthening of the Japanese yen against the US dollar.

It is also necessary to emphasize investors' sentiments regarding the Japanese currency. They are hedging their positions as they fear its strengthening.

According to Bloomberg’s observation, asset managers have reduced bearish positions on the yen more than in the last three years. Inflation continues to weigh on the BOJ, forcing it to adjust its ultra-soft monetary policy this year.

Takeshi Ishida, currency strategist at Resona Bank Ltd, believes that although the yen is currently facing depreciation pressure, traders are hedging the risk of currency strengthening.

As per the technical analysis, the USDJPY currency pair rose from the whole correction wave to 0.618 Fibonacci level. We assume an attempt of reversal from it on the background of fundamental drivers of the yen growth.

The downside target will be the level just above 0.382 Fibonacci, which corresponds to 140.5. There is also a strong bullish candle, and this could act as support. A stop-loss will be set at updating the local highs and overcoming the 0.618, which corresponds to 142.2.

Decrease in USDJPY:

Take profit — 140.5

Stop-loss — 142.2

This content is for informational purposes only and is not intended to be investing advice.

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