USD/JPY Analysis: Post-BoJ/Fed momentum lacks follow-through, 110.00 holds the key

• A combination of factors assisted USD/JPY to gain strong positive traction on Wednesday.
• The Fed took a hawkish tilt and provided an additional boost to the intraday positive move.
• Retreating US bond yields acted as a headwind for the USD and capped gains for the pair.

The USD/JPY pair gained strong positive traction on Wednesday and recovered a major part of its weekly losses recorded over the past two trading sessions. Some positive news from China boosted the global risk sentiment and undermined the safe-haven Japanese yen, which was further weighed down by the Bank of Japan's bleaker view on exports and output. Struggling developer China Evergrande Group agreed to settle interest payments on a domestic bond on Wednesday and eased immediate fears of a spillover effect to other property firms and banks. The market concerns eased further after the People's Bank of China injected 90 billion yuan ($13.9 billion) into the banking system.

Meanwhile, the BoJ left its short-term interest rate target unchanged at -0.1% and that for 10-year bond yields around 0%, without an upper limit on bond purchases. The Japanese central bank stuck to its optimistic view that robust global growth will keep the economic recovery on track, albeit showed the willingness to maintain its ultra-ease policy stance. In the post-meeting press conference, the BoJ Governor Haruhiko Kuroda reaffirmed that the central bank will ease the policy further without hesitation as needed. The central bank also said that exports and factory output – though continue to increase – are partly affected by supply constraints caused by the coronavirus pandemic.

The combination of factors, to a larger extent, helped offset a modest intraday US dollar weakness and provided a goodish lift to the major. The positive momentum picked up pace after the Fed turned more hawkish and helped revive the USD demand. The Committee judged that moderation in the pace of asset purchases may soon be warranted if economic progress continues broadly as expected. The Fed Chair Jerome Powell added that the central bank could begin scaling back asset purchases in November and complete the process by mid-2022, setting the stage for early interest rate hikes. Moreover, the so-called dot plot revealed a growing inclination to raise interest rates in 2022.

The momentum pushed the pair back closer to the key 110.00 psychological mark, though lacked any follow-through amid the emergence of some selling around the greenback. The ongoing downfall in the US Treasury bond yields acted as a headwind for the buck, which, in turn, kept a lid on any further gains for the major. That said, the prevalent risk-on mood might continue to lend some support and help limit the downside. Market participants now look forward to the US economic docket, highlighting the release of Weekly Initial Jobless Claims and Flash PMI prints for a fresh impetus later during the early North American session.

Short-term technical outlook

From a technical perspective, repeated bounce from the vicinity of the 109.00 mark suggests that the recent leg down has run its course. That said, the lack of any follow-through buying warrants some caution for aggressive bullish traders. Hence, it will be prudent to wait for some follow-through buying beyond the 110.00 mark before positioning for any further gains. The next relevant hurdle is pegged near the 110.25-30 supply zone, which if cleared decisively should allow bulls to aim back to reclaim the 111.00 mark for the first time since July.

On the flip side, the 109.60-55 region now seems to protect the immediate downside ahead of the monthly swing lows, around the 109.10 region. A convincing break below will negate any near-term positive bias, instead prompt aggressive selling and turn the pair vulnerable. The downward trajectory could then get extended towards August swing lows, around the 108.75-70 region en-route the 108.45-40 intermediate support and the 108.00 mark.