USDJPY – Bank of Japan Policy Decision & the 10-yr JGB Yield

The USDJPY had been trading steadily higher in February, from the 128.50 support level, up toward the 137 round number resistance level. This move was driven by a combination of fundamental reasons (strengthening of the DXY and overall weakness of the Japanese Yen) and technical setup (the golden cross, where the 50-period Moving Average crossed over the 200-period Moving Average).

This week, the Bank of Japan (BoJ) is set to release its latest decision on its Policy Rate and the accompanying Monetary Policy Statement. The BoJ is expected to persist with its current stance, maintaining an ultra-lose monetary policy approach as it is the last BoJ policy meeting for Governor Kuroda.

However, last week, the yield on the 10-yr Japanese Government Bonds (JGBs) consolidated slightly above the 0.5% ceiling adjusted by the BoJ on 20th December 2022. Following the announcement of the increased yield limit, the Japanese Yen strengthened significantly, with the USDJPY trading down from 137.30 to 130.60. The markets are now watching if the BoJ would take on a similar action again.

As the DXY weakened toward the end of the week, the USDJPY was dragged lower, reversing from the 137 resistance level, down to the 135.80 price level to test the 50-period Moving Average. If the price breaks below the Moving Average support level, the USDJPY could trade down to the key support level of 134.50 which coincides with the 38.3% Fibonacci Retracement level.

If the BoJ were to further adjust the yield limits on the 10-yr JGBs, the USDJPY could see a continuation of the downside beyond 134.50, with the next key support level at the 133 price area, formed by the round number and 61.8% Fibonacci Retracement level.