USD/JPY Bears to Target Sub-130 on Federal Reserve Policy Bets

It was a quiet start to the day for the USD/JPY. There are no material stats for investors to consider. The lack of stats will leave the pair in the hands of market risk sentiment as bank sector stress subsides for now.

However, we expect investor attention to turn toward the Fed, the interest rate decision, and likely forward guidance. Hawkish bets are off the table, with the collapse of Silicon Valley Bank (SIVB) and Signature Bank (SBNY) forcing the Fed to take its foot off the gas.

Despite the banking crisis, the markets expect a 25-basis point rate hike on Wednesday with a signal to pause monetary policy tightening. The marked shift in sentiment toward the Fed dragged the USD/JPY to sub-131 on Monday.

While governments and central banks may have contained the banking crisis, news of more banks coming under pressure will move the dial. The Fed may need to reverse course later this year. Signals of a rate cut would put the USD/JPY under more pressure.

USD/JPY Price Action

This morning, the USD/JPY was down 0.03% to 131.274. A mixed start to the day saw the USD/JPY rise to an early high of 131.605 before easing back.

Technical Indicators

The USD/JPY must move through the 131.500 pivot to target the First Major Resistance Level (R1) at 132.461 and the Monday high of 132.651. A return to 132 would signal a bullish USD/JPY session.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 133.613. The Third Major Resistance Level sits at 135.726.

Failure to move through the pivot would leave the First Major Support Level (S1) at 130.348 in play. However, barring a risk-off-fueled extended sell-off, the USD/JPY pair should avoid sub-130 and the Second Major Support Level (S2) at 129.387. The Third Major Support Level (S3) sits at 127.274.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The USD/JPY sits below the 50-day EMA (133.402). The 50-day EMA pulled back from the 200-day EMA, with the 100-day EMA narrowing to the 200-day EMA, delivering bearish signals.

A USD/JPY move through R1 (132.461) would bring the 50-day (133.402) and R2 ($133.613) into play. A breakout from the 50-day EMA would send a bullish signal. However, failure to move through the 50-day EMA (133.402) would leave the Major Support Levels in play.

The US Session

Looking ahead to the US session, it is a quiet day on the US economic calendar. Existing home sale figures for February will be in focus. However, with investors monitoring banking sector-related news and looking toward the Fed monetary policy decision, the numbers are unlikely to move the dial.

Having taken a 50-basis point interest rate hike off the table, investors need to consider whether the Fed will materially adjust the dials. It will be a balancing act to ease pressure on banks but continue to bring persistently high inflation under control.

There are no FOMC member speeches to consider. The Fed is in a blackout period, leaving investors to consider how the Fed will respond to the banking sector crisis.