Dollar Sees Value Hunting Against the Yen

A bullish outlook prevails as long as the pair remains above this zone, and we can anticipate a favorable market sentiment.

• The US dollar experienced a slight retracement against the Japanese yen during Tuesday’s session.
• However, the overall uptrend remains intact as traders enter the market to stabilize the upward move.
• The primary driving force behind this trend is the interest rate differential between the Federal Reserve and the Bank of Japan, particularly due to the Bank of Japan’s yield curve control policy.

Given the current environment, it is challenging to envision a scenario where the USD/JPY pair deviates from its established trajectory. In fact, an ascending triangle pattern has been forming, indicating the potential for further upward pressure. A decisive breakthrough above the ¥138 level would trigger a more significant rally.

The 50-Day Exponential Moving Average (EMA) lies beneath the current price, with the 200-Day EMA positioned just below that. These levels revolve around the ¥134 mark. A bullish outlook prevails as long as the pair remains above this zone, and we can anticipate a favorable market sentiment. Should the price decline below these moving averages, the lower boundary of the ascending triangle would come into play, offering substantial support. A breach of this triangle would drastically alter the overall market outlook.

In the event of a daily close above the ¥138 level, I firmly believe that the market could experience a substantial rally, potentially targeting the ¥148 level. The Bank of Japan’s commitment to maintaining an ultra-loose monetary policy, occasionally flooding the market with the Japanese yen to purchase bonds, suggests a sustained upward pressure on this pair. However, it is essential to acknowledge that significant volatility is to be expected throughout the journey, as the pair remains highly sensitive to interest rate differentials and economic announcements that provide insights into potential future interest rate movements. Furthermore, it is worth noting that the market is actively attempting to convince itself that the Federal Reserve will need to ease its monetary policy sooner rather than later. While this belief may not necessarily be accurate, it certainly significantly influences this currency pair.

The US dollar’s retracement against the Japanese yen during Tuesday’s session should be viewed within the context of the broader uptrend. The interest rate differential between the Federal Reserve and the Bank of Japan serves as the primary catalyst for this pair. The Bank of Japan’s ultra-loose monetary policy and occasional Japanese yen injections into the market support the expectation of continued upward pressure. However, market participants should prepare for heightened volatility as interest rate differentials and economic announcements shape market sentiment. A daily close above the ¥138 level would signal a potential for substantial gains, with a possible target of ¥148. While the belief that the Federal Reserve may need to loosen its monetary policy has an influential impact on the pair, it is important to evaluate such narratives critically.

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