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09 Mar 2024

USD/JPY analysis: Japanese yen could further extend rally ahead of key BoJ decision

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The Japanese yen has been on a remarkable surge lately, bolstered by speculation surrounding a potential rate hike by the Bank of Japan (BoJ). This surge comes amidst a mixed jobs report from the US, which initially pushed the US dollar off its lows. However, despite this bounce, the yen maintained its strength against other currencies, indicating a bullish sentiment underlying the market. Looking ahead, key data releases from the US, including CPI and retail sales figures, are poised to influence market dynamics in the coming week.

So, why exactly has the Japanese yen experienced such a surge? Speculation is rife that the Bank of Japan might finally be considering a departure from negative interest rates, with hawkish comments from BoJ policymakers fueling these expectations. Additionally, stronger-than-anticipated wage growth and positive inflation data have further bolstered bets on the BoJ's policy shift. With Japan's economy potentially on the brink of policy normalization, the current moment appears opportune for such a move.

On the other hand, the US dollar witnessed a decline last week, albeit recovering slightly towards the end following the release of a mixed jobs report. While the headline figure showed job gains, revisions to previous data, unexpected upticks in unemployment, and subdued wage growth tempered overall optimism. This development has led to speculation that the Fed might consider rate cuts in the future, contributing to downward pressure on the dollar.

Looking at the broader market outlook, with US bond yields decreasing and Japanese yields rising, the yield differentials between the two countries are narrowing. This trend, if sustained, could further bolster the yen's rally, potentially weighing on the USD/JPY and other yen crosses.

In terms of technical analysis, the USD/JPY pair faces key support levels around the 146.00-146.50 area, while resistance is seen near 147.62. A break below support could pave the way for further downside towards the 61.8% Fibonacci retracement level. Conversely, a breakout above resistance could signal a reversal of fortunes for the USD/JPY pair.

Looking ahead, investors will closely monitor key data releases from the US, particularly CPI and retail sales figures. Any surprises in these reports could have significant implications for the USD/JPY pair, shaping market sentiment and direction in the near term.

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