Dollar Index (DXY) Retreats as USD/JPY Ticks Lower, 145.00 Incoming?

JAPANESE YEN, DXY PRICE, CHARTS AND ANALYSIS:

Most Read: Short USD/JPY: A Reprieve in the DXY Rally and FX Intervention by the BoJ (Top Trade Q4)

YEN FUNDAMENTAL BACKDROP

The Japanese Yen has been a surprise beneficiary of the tension in the middle east. The last 12 months has seen the US Dollar benefit more than the Yen from safe haven flows, something which seems to have reversed this week. USDJPY has fallen today as the DXY itself struggled to hold onto European and Asian session gains.

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Today marks 6 months since Kazuo Ueda became the Governor of the Bank of Japan (BoJ). According to insiders Ueda was appointed against the odds to lead the BoJ toward policy normalization. We have had a tweak to the YCC policy but continued rhetoric from the Governor suggests that policy normalization remains some way off.

Governor Ueda has constantly spoken about the need for wage growth to exceed inflation on a consistent basis. 2024 Shunto Spring labor-management negotiations at private sector companies is likely to be key to Ueda’s plans for policy normalisation.

BoJ ON THE BOND PURCHASE OFFENSIVE, MORE TO COME?

Last week saw the BoJ conduct a large-scale bond buying operation in an effort to bolster the Japanese Yen just as USDJPY crossed the 150.00 threshold. The immediate response was a quick drop of around 250 pips followed by a swift recovery. The BoJ first announced the extraordinary purchases on October 2. In its statement, it said “the bank will make nimble responses by, for example, conducting additional outright purchases of JGBs.”

Now interestingly last year saw a similar response to the initial intervention by the BoJ with a spike lower before printing a fresh high. This was the precursor for what turned out to be quite a sizeable drop in USDJPY. This poses the age-old question, is history about to repeat itself?

DOLLAR INDEX (DXY)

The Dollar Index looked set for a drop this week following a shooting star candle close last Friday of a key area of resistance. The start of the Israel-Palestine conflict over the weekend however, seemed to have re-energized the US Dollar. As the day has progressed however, the DXY has surrendered its gains with a lot of geopolitical uncertainty and US CPI still ahead this week.

From a technical perspective the Dollar Index (DXY) continues to struggle at the 107.00 resistance area. At this stage however, I am not yet convinced that the US Dollar rally has fully run its course. Given the fundamental backdrop and geopolitical situation the chance of another retest of the 107.00 mark remains a possibility.

Dollar Index (DXY) Daily Chart

Source: TradingView, prepared by Zain Vawda

RISK EVENTS AHEAD

Besides the ongoing geopolitical tensions, markets were poised for the all-important US CPI print this week. The importance cannot be undermined in light of the recent uptick in headline inflation with another hot print likely to ramp up recessionary fears but should be positive for the USD from a safe haven perspective. Either way it seems the USD is well poised as Q4 unfolds.

There is quite abit of mid-tier data out of Japan this week but unlike the US, these individual data points generally have a limited impact on the Yen. This is largely down to the monetary policy stance of the BoJ, as none of these data releases are likely to result in a change in policy, regardless of the actual number.

For all market-moving economic releases and events, see the DailyFX Calendar

PRICE ACTION AND POTENTIAL SETUPS

USDJPY

Key Levels to Keep an Eye On:

Support levels:

• 148.00
• 146.69 (50-day MA)
• 145.00

Resistance levels:

• 149.30
• 150.00 (Psychological level)
• 152.00 (2022 Highs)

USD/JPY Daily Chart

Source: TradingView, prepared by Zain Vawda

IG CLIENT SENTIMENT

Taking a quick look at the IG Client Sentiment Data whichshows retail traders are 82% net-short on USDJPY. Given the contrarian view adopted here at DailyFX, is USDJPY destined to rise back toward the 150.00 handle?

For tips and tricks regarding the use of client sentiment data, download the free guide below.

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda