BOJ Preview: next big driver for the FX market volatility

Central banks will dominate financial markets headlines this week as the Bank of Japan and the US Federal Reserve are scheduled to announce their respective monetary policy decisions on Wednesday. With no move expected from the Fed, BOJ would steal all the attention as policymakers remain divided over the best way to maintain and possibly expand the central bank’s ultra-loose monetary policy in order to support fragile economy. Market expectations range from following the Federal Reserve's 2011 "Operation Twist" of purchasing longer-term debt and selling short-term debt, to taking interest rates farther into negative territory and (or) stepping up the asset purchases.

In addition to this, the BOJ will also conduct a comprehensive review that will evaluate the effectiveness of the central bank’s monetary policy measures, contributing to increase the importance of this week’s meeting. There would be strong market interest around BOJ monetary policy decision and hence, could eventually turn out to be the next potential driver for volatility in the FX market.

The next big question is how the Japanese Yen would react to BOJ decision. The market seems to be approaching the big event with expectations for a dovish outcome and hence, yet another disappointment is going to be highly Yen positive.

Here are some key technical levels for important JPY pairs - USD/JPY, EUR/JPY and GBP/JPY.

USD/JPY

Despite of its recent bounce back above 50-day SMA, the pair failed to clear 104.30-40 resistance area (61.8% Fibonacci retracement level of the decline from July highs), signaling lack of follow through buying interest. The pair, however, has held 23.6% Fibonacci retracement level support near 101.40-20 region and has been stuck in a broad trading range between 103.00-101.00 area. Hence, it would be prudent to wait for a decisive break through the ongoing trading range before confirming the next leg of direction move for the pair.

On a sustained weakness below 101.00 handle, the pair is likely to accelerate the slide immediately towards 100.00 psychological mark below which a fresh leg of weakness would pave way for continuation of the near-term downward trajectory towards its next major support near 97.00 region. Post-Brexit swing low near 99.00 level might provide some intermediate support.

Alternatively, a follow through buying interest back above 50-day SMA, leading to a subsequent move through 103.00 handle, the pair seems all set to make a dart beyond September monthly high resistance near 104.30 and head towards 100-day SMA resistance near 104.60 region. A convincing strength above 100-day SMA for the first time since early February should open room for additional near-term appreciating move for the pair towards 106.00-25 resistance and the momentum could further get extended towards its next major resistance near 107.50 region (July swing high).

EUR/JPY

Having broken below 61.8% Fibonacci retracement level support of July 2012- Nov. 2014 bullish run, the pair has failed to register any meaningful recovery and has struggled to sustain its move back above the said support break-point. Moreover, the cross has been oscillating within a short-term symmetrical triangular formation on daily chart, indicating a consolidation phase before resumption of the previous weakening trend.

From current levels, a short-term ascending trend-line near 113.75-70 area seems to protect immediate downside, which if broken decisively is likely to drag the pair immediately towards 112.60-50 support before the pair eventually drops to retest July daily closing lows support near 111.00 handle.

On the flip side, rebound from ascending trend-line support and a subsequent momentum above 114.40-50 resistance is likely to get extended towards 115.40 intermediate resistance en-route the symmetrical triangular formation resistance near 116.00 handle. A sustain break above 116.00 resistance would negate any near-term bearish bias and help the pair immediately towards 100-day SMA resistance near 117.00 handle before attempting a move towards post-Brexit recovery swing highs resistance near 118.40-45 region.

GBP/JPY

The cross has plunged below an important confluence support near 135.00 psychological mark, comprising of 38.2% Fibonacci retracement level of the advance from August lows, 20-day and 50-day SMAs. Hence, a follow through selling pressure below 61.8% Fibonacci retracement level support near 132.80-75 zone is likely to turn the pair vulnerable to accelerate the downslide towards 131.00-130.80 horizontal support. On a sustained weakness below 131.00 handle, the pair could further depreciate back towards post-Brexit swing lows support near 129.00 region.

Meanwhile on the upside, the cross needs to move and sustain its strength back above 135.00 mark in order to increase the prospects of further up-move in the near-term. On a convincing move above 135.00 level, also coinciding with a short-term descending trend-line resistance, should boost the cross immediately towards 137.00 round figure mark before making a fresh attempt to retest monthly high resistance near 138.50 region.