USD/JPY bounces back as Japan signals more stimulus

The yen plummeted against its major counterparts on Monday after news that Japanese Prime Minister Shinzo Abe’s Liberal Democratic Party won a landslide victory in Upper House elections, providing much anticipated support for Abe’s controversial economic stimulus program, Abenomics. The political victory was followed shortly after by an announcement that Abe would be implementing additional stimulus measures in attempts to boost Japan’s ailing economy.

As might have been expected after such news, Japan’s Nikkei index jumped by nearly 4% while the yen took the opposite route by falling precipitously against the US dollar, euro, and British pound, among other key rivals. In the case of USD/JPY, the yen plunge prompted a substantial boost for the embattled currency pair, which had been trading not far off its post-Brexit multi-year low slightly below 99.00 that was hit just over two weeks ago.

The Abe-driven fall in the yen has led to a sharp USD/JPY rebound off the key 100.00 psychological support level, which has long been seen by traders as a major "line-in-the-sand" in terms of the potential risk of Japanese currency intervention. Prior to Monday’s surge, USD/JPY had been consolidating just above 100.00 late last week, toying with a potential breakdown towards new lows. That breakdown clearly has not occurred, at least for the time being. Currently, the sharp rebound off 100.00 has pushed the currency pair back up to approach key resistance around the 103.00 level.

Any strong breakout above the 103.00 level would be a significantly bullish technical signal suggesting follow-through momentum on the rebound from 100.00. In this event, continued pressure on the yen from new stimulus measures could push USD/JPY up to major upside resistance targets around 105.50 and then 108.00. To the downside, the 100.00 psychological level remains the most important support level to watch on any resumption of the year-long downtrend.

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