USD/JPY pares gains ahead of Fed/BoJ

USD/JPY has begun to pare its gains after having surged above key resistance at 111.00 late last week due to reports that the Bank of Japan (BoJ) is considering potentially more aggressive easing actions in the form of additional stimulus measures. This would entail the implementation of negative lending rates to financial institutions in Japan.

Though the yen immediately began to plummet as the market digested this information (resulting in the noted USD/JPY surge), it should be noted that a similar tumble for the Japanese currency occurred when the BoJ pushed interest rates into negative territory in late January. Immediately thereafter, however, the yen embarked on a period of major strengthening for the ensuing months.

Therefore, the effectiveness of the BoJ’s easing tools and tactics has come into question. Could the yen once again shrug off the central bank’s attempts at restraining its rise? This week brings the Bank of Japan’s highly anticipated monetary policy meeting and statement. Indeed, last week’s reports of the BoJ’s plans for more easing has set the tone for higher expectations of action this week. The question still remains, however, as to what sustainable effect that might have on the yen, if any.

Since the end of last year, USD/JPY has been entrenched in an intermittently plunging downtrend as the dollar has declined and the yen has surged. A few of those sharp slides were due to yen strengthening in its role as a safe haven currency during times of market turmoil and volatility, especially earlier in the year. Most recently, the currency pair fell to a major downside support target at 108.00, but has been unable to break down below that key support level as of yet.

Last week’s rebound from that 108.00 support level was largely due to both a dollar resurgence along with the noted reports of potentially impending stimulus actions from the Bank of Japan. Aside from the BoJ monetary policy meeting this week, of course, is the eagerly awaited FOMC statement from the US Federal Reserve. The Fed is not expected to make any changes to interest rates at its meeting this week, as the central bank has generally become increasingly dovish since its rate hike in December, but will provide its current outlook on the common concerns of low inflation and economic growth risks.

The interplay between these two central bank meetings in the US and Japan this week should play a primary role in determining direction for the USD/JPY currency pair in the near-term. From a bearish trend perspective, any return below the 110.00 support level could lead to a resumption of the downtrend towards 108.00 support once again. A further breakdown below 108.00 could then target the next major support objective at 105.00. To the upside, in the event of any further rebound to extend last week’s rally, major resistance can be found around the 114.00 level.

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