USD/JPY Forex Technical Analysis – Aggressive Fed Rate Hike Likely to Offset Intervention Concerns

The Dollar/Yen is trading lower on Wednesday after touching a 24-year high earlier in the session. The intraday weakness is being fueled by a slight pullback in U.S. Treasury yields overnight. However, the limited upside movement this week suggests investors may be fearing an imminent intervention by the Japanese government.

While most eyes are on the U.S. Federal Reserve’s interest rate and monetary policy decisions late in the day, some are monitoring the events in Japan, where on Monday, a top government spokesperson said that Tokyo is concerned about the Yen’s sharp fall and stands ready to “respond appropriately” if needed.

At 04:57 GMT, the USD/JPY is trading 135.106, down 0.354 or -0.26%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust settled at $69.27, down $0.41 or -0.59%.

The Federal Reserve is widely expected to raise its benchmark interest rate by 75 basis-points when it ends its 2-day meeting at 18:00 GMT on Wednesday. On paper, this will be bullish news.

However, after Bank of Japan (BOJ) Governor Haruhiko Kuroda said Monday that the recent abrupt slide of the currency is bad for the economy, we could see limited upside action, or even a pullback if the BOJ intervenes.

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through the intraday high at 135.599 will signal a resumption of the uptrend.

A move through 126.362 will change the main trend to down. This is highly unlikely, but due to the prolonged move up in terms of price and time, the market is ripe for a potentially bearish closing price reversal top.

The minor range is 126.362 to 135.599. Its trailing retracement zone at 130.981 to 129.891 is the nearest support area.

Daily Swing Chart Technical Forecast

Trader reaction to 135.460 is likely to determine the direction of the USD/JPY early Wednesday.

Bullish Scenario

A sustained move over 135.460 will indicate the presence of buyers. Taking out the intraday high at 135.599 will indicate the buying is getting stronger. This could trigger an acceleration to the upside since there is no visible resistance.

Bearish Scenario

A sustained move under 135.460 will signal the presence of sellers. Taking out 133.878 will indicate the selling is getting stronger. This could trigger the start of an acceleration to the downside with the next target area coming in at 130.981 to 129.891.

Side Notes

The reasons for the Japanese Yen’s weakness against the U.S. Dollar are the widening interest rate differentials and the divergence in policies between the Federal Reserve and Bank of Japan.

Although an intervention may cause short-term weakness in the Dollar/Yen, the market is not expecting it to stop the Forex pair’s rally. The uptrend is unlikely to stop until U.S. economic growth slows or inflation peaks.