23.01.201800:16 Forex Analysis & Reviews: USD/JPY: Price outpost - 110 Mark

The trading week opened with a gap in the direction of weakening the US currency for all dollar pairs. Given the suspension of funding for the US government, the price gap was rather modest: apparently, the market does not doubt that at today's emergency meeting of the Senate, an appropriate resolution on interim financing will still be adopted. But in general, the dollar continues to show weakness, despite attempts at corrective growth.

The dollar-yen pair did not become an exception today: after opening the trading at 110.55, the pair closed the downward gap during the Asian session and even tried to develop the upward movement, but, was unsuccessful: any significant growth USDJPY traders use to open short positions. Today, the economic calendar for the pair is almost empty, so the market is now mostly traded "in anticipation" of the January meeting of the Bank of Japan, which will take place tomorrow.

Here it is worth noting that in early January, the Japanese regulator made an unexpected decision, reducing the purchase of bonds. The central bank reduced the volume of government bonds to be purchased with maturity in 10-25 years and bonds with redemption of 25-40 years. The market interpreted these actions in its own way: according to many currency analysts, the Bank of Japan thus began to gradually tighten monetary and credit policy. After that, the USDJPY pair fell from the 113th figure to the area 110-111, where the downward momentum impulse lost its force.

Two-hundred fifty points of decline - a relatively modest result for such a strong information guide, as tightening monetary policy. The thing is that traders are not completely sure whether the market "understood" correctly the actions of the Japanese regulator. First, Haruhiko Kuroda subsequently reported that the stimulus program will remain in effect until inflation reaches the target level. Secondly, many experts say that there are no warning signals from the Bank of Japan, and the need to reduce purchases of Japanese state securities was caused by "technical necessity".

There is one more argument in favor of the fact that the central bank of Japan will not confirm tomorrow the tapering of the stimulating program. It is about the market reaction to the mentioned actions of the regulator. A slight decrease in the volume of purchases led to the strengthening of the yen by almost 300 points. Further strengthening of the national currency may negatively affect inflationary processes. In addition, in January, a rise in bond yields was recorded, which is also bad news for Kuroda.

Weakness of the US currency can also affect the statements of the members of the Japanese regulator. Any optimism about the prospects for the national economy, and even more hints on the curtailment of incentives, will strengthen the yen in pairing with the dollar by a few more figures. This is an unacceptable scenario for the Bank of Japan, especially now that inflation has only begun to show signs of recovery.

Nevertheless, Kuroda is unlikely to ignore the success of the national economy. The country's GDP is growing for the seventh consecutive quarter - this is the longest growth streak in the last 28 years. Last week data on orders in the field of engineering in Japan were published. The result has far exceeded expectations: instead of the projected growth of 1%, the indicator jumped immediately by 4.1% (year on year). This suggests that the next release of GDP data can also pleasantly surprise traders. And all this - against the background of a decrease in unemployment (to a 24-year low, 2.7%), an increase in household spending, business activity and an increase in the consumer price index.

In other words, the Japanese regulator has no obvious cause for concern. Indirectly, the Bank of Japan has already confirmed this fact, having increased in its quarterly report an estimate of economic growth for 3 out of 9 regions of the country. These are the data of the regional branches of the central bank, but they will surely be confirmed at tomorrow's meeting of the Board of Governors.

Thus, the main task of the Bank of Japan is now to maintain current trends. In such circumstances, Kuroda will try to maintain the appropriate balance. On one hand, the regulator is likely to raise the forecast for inflation, but on the other hand, it will categorically rule out the completion of the stimulus program in the foreseeable future.

It should be emphasized that Kuroda's "dovish" rhetoric may not have the desired effect. Having raised the forecast for inflation, the Bank of Japan in fact recognizes the fact that the completion of the stimulating program will occur earlier than the planned time. The growth of oil quotations can only spur inflationary dynamics, thus bringing the "X Hour" closer. Such a cause-and-effect relationship will provoke a new downward impulse over the USDJPY pair, especially on the background of the general weakness of the dollar.

Technically, the pair's bears need to overcome the key mark 110. It corresponds to the lower line of the Bollinger Bands indicator and is a kind of price outpost. Since April of last year, pair bear only broke this level once, but only for a week could gain a foothold at 107. After that, the price returned to area 111-113. Trend indicators (such as Ichimoku Kinko Hyo and Bollinger Bands) on D1 also give priority to the downward decline - at least to the above-mentioned support level 110. The first resistance level is the Tenkan-sen line and the price is 111.70. The second level is the 112.0 mark - this is the Kijun-sen line, which coincides with the middle line of the Bollinger Bands indicator on the daily chart.