Japanese Yen Technical Analysis: USD/JPY, EUR/JPY, GBP/JPY

Japanese Yen Talking Points:

• Later tonight brings a Bank of Japan rate decision, and the watch is on for any hints or clues of change on the horizon.
• As evidence mounts that rate hikes are likely finished in other economies, the question is for how long bullish trends might remain in Yen-pairs such as USD/JPY, EUR/JPY and GBP/JPY. While the carry trade built strong trends in each market in 2023, the prospect of carry unwind can motivate selling, such as we saw in Q4 of 2022.
• The carry unwind theme has appeared to begin in USD/JPY, and a bit less so in EUR/JPY and GBP/JPY who both carry some form bullish continuation potential into tonight’s BoJ meeting.

Is the BoJ finally ready to respond to inflation?

Last week saw the Fed take a dovish twist, and this was echoed the morning after from the European Central Bank. And while the BoE did retain a degree of hawkishness, warning that rates would stay sufficiently high for sufficiently long, it does seem that we’re closer to the end of rate hikes there, as well.

And as Central Banks in the US, Europe or the UK prepare to turn the next corner into cuts as inflation has shown signs of progress, we still haven’t heard from the Bank of Japan where rates remain in negative territory. This has been somewhat of a hot button for more than a year now, as we saw the USD/JPY reversal get started in Q4 of 2022 and that ran for three months, as 50% of the prior trend was erased after the pair began to reverse after a CPI print on November 10^th of last year.

There was a similar show in Q4 of this year, with a bearish theme in USD/JPY developing after a US CPI print that was released in November. But the corresponding sell-off in USD/JPY has been quite a bit different, as last year’s was largely an aggressive breakdown that clearly showed the shift in the market, while this year’s has been showing in a trending fashion with two steps down and then one step back up.

On the below daily chart of USD/JPY, we can see that theme getting priced-in. And notice how the retracements in the sell-off have been sizable which makes the prospect of chasing the move lower somewhat daunting.

USD/JPY Daily Price Chart

Japan Inflation

Up to this point the Bank of Japan has appeared to be unbothered by the persistent inflation that’s shown in the economy. And after decades of deflation, it can make sense as to why they might want to err on that side of the coin. But the fear of a move off negative rates can even be drawn back to last year when we saw that reversal in USD/JPY. This was more-driven by the dynamics in the USD as opposed to the JPY, but the point remains the same, as a loaded carry trade started to show symptoms of unwind as fear of a USD-reversal took over.

Last year, that came on the back of a 7.7% headline CPI print that was delivered on November 10^th. This year, the CPI print that was released on November 14^th was quite a bit lower, at 3.2%, but similarly it was below the expectation which helped to further build bets that the Federal Reserve is closer to rate cuts than hikes.

And while the carry is still positive on the long side of the pair, the prospect of principal losses can be enough to obviate the attractiveness of the carry. So, if we are on the verge of seeing US rates move lower at some point in 2024, investors may not wait around in USD/JPY.

But, perhaps more impactful would be a hint from the Bank of Japan that they’re ready to adjust policy in response to inflation. This could potentially get both sides of the pair pushing in the same direction as carry trades have even more motivation to unwind for fear of deeper principal losses.

There’s but one problem with that scenario:  It would likely trigger a larger theme of Yen-strength, and much as the BoJ and the Japanese economy have seen over the past 40 years, a strong currency may not help the decades-long battle against deflation. The fact that the Yen has already strengthened over the past month, with approximately 900 pips of deviation from the November high down to current prices in USD/JPY, the BoJ may not feel the motivation to kick rates higher at the moment as that currency strength could do some of the lifting for them. Much as we saw in 2021 and 2022 with the US Dollar, a strong currency can help to whittle away at inflation and in Japan, where the currency has gotten quite strong (on a relative basis) over the past month, there could reasonably be some pressure on inflation to follow.

From the weekly chart below, we can see where four of the past five weeks have finished in the red for USD/JPY; and the one that didn’t was a simple doji after a bounce from 147.37 support. We can also see price testing a huge spot on the chart, at the 142.50 psychological level which is also the 61.8% Fibonacci retracement of the prior pullback move. This is also confluent with the 200 day moving average so there’s a few reasons for buyers to hold the lows as we move into this evenings rate decision out of Japan.

USD/JPY Weekly Price Chart

BoJ Preview: To Hint, or Not to Hint

When this theme started to get more attention in Q4 of last year, one of the big items on the radar was a leadership change atop the BoJ, which happened this April. But, there hasn’t really been much else for change as Kazuo Ueda has largely stuck with the status quo, ordering a policy review in his early tenure but largely continuing with Kuroda’s dovish ways otherwise. This has become so widely watched that even a small, subtle change to the bank’s statement could carry repercussion from traders looking for any possible sign of change on the horizon.

The bigger question there is what market participants hear and respond to, as avoiding the issue altogether could lead to a run of Yen-weakness as a bit of pressure is removed from the long side of the currency. Perhaps the more operative question after that – is whether traders should look for themes of Yen-weakness against the US Dollar, or perhaps in another pairing that may bring aspirations of potentially higher rate differentials.

In USD/JPY, given the above scenario where we may be witnessing a larger-scale trend shift, this could open the door for a pullback to lower-high resistance. And for longer-term traders, that set up could open the door for bigger-picture bearish strategies. From the four-hour chart below, we can see the bearish trend in USD/JPY pricing in, and there’s a trendline that’s confluent with resistance at 145 through tomorrow.

USD/JPY Four-Hour Price Chart

EUR/JPY

At last week’s ECB rate decision Christine Lagarde said that the bank hasn’t started talking about rate cuts yet, which seems less dovish than Powell’s comments from a day earlier when he said that those conversations have started at the Fed. This helps to explain the net outlay of strength in EUR/USD from last week, and it also has a role in EUR/JPY which seems a bit less bearish than USD/JPY above.

We can something similar on the below daily chart of EUR/JPY. While USD/JPY pushed down to a fresh four-month low last week, EUR/JPY did not, instead holding above the swing low from the prior week. There’s also the matter of the 200-day moving average, which USD/JPY is working on again for today’s daily candle, but in EUR/JPY, the support tests at its own 200 dma have been rather clean, so far, with no daily closes below that level and a series of wicks showing higher-lows as that indicator has come back into the picture.

There’s resistance at 157.70, and if bulls can push through that then the next area of resistance opens up at 159.62. On the underside of price action, the next support zone that I’m tracking runs from 151.62 to 152.06.

EUR/JPY Daily Price Chart

GBP/JPY

Extending the anecdote of these recent rate meetings, and the Bank of England seemed to be the least dovish amongst the Fed, ECB and BoE. And from a price action perspective there’s some match with the technical backdrop in GBP/JPY, which hasn’t yet re-engaged with the 200-day moving average. But, there’s also the matter of lows as EUR/JPY set a fresh four-month low earlier in December, USD/JPY set a fresh four-month low just last week; and GBP/JPY hasn’t as price has held above the early-October swing low.

If the BoJ does punt on the topic of policy normalization, GBP/JPY could be one of the more attractive venues given that dynamic. There would likely be a degree of Yen-weakness pricing in all three pairs mentioned in this article but given the Fed’s shift away from hikes along with the ECB that’s expected to follow closely behind, the BoE remains as somewhat of an outlier in their hawkishness.

That’s the type of backdrop that could, potentially, allow for the pair to re-test its longer-term resistance around the 195.00 handle.

GBP/JPY Monthly Price Chart

On a shorter-term basis the 180.00 level remains a key spot for GBP/JPY, and despite a probe below that level with an underside wick of almost 200 pips last Thursday, that price has held and hasn’t seen a daily close below since early-October.

Below that is a wide-open space but the next relevant level appears at 178.10 and that’s confluent with the 200-day moving average. If price breaks below that over the next day, then there will probably be similar downward pressure in USD/JPY and EUR/JPY, and the question at that point is whether GBP/JPY is a more attractive venue for carry unwind themes than EUR/JPY or USD/JPY.

GBP/JPY Daily Price Chart

--- written by James Stanley, Senior Strategist