- USD/JPY meets with a fresh supply on Friday and is pressured by broad-based USD weakness.
- Expectations for a less hawkish Federal Reserve exert heavy downward pressure on the buck.
- Fears of a full-blown global banking crisis benefit the safe-haven JPY and contribute to the fall.
- The BoJ’s dovish outlook should cap gains for the JPY and help limit deeper losses for the pair.
The USD/JPY pair struggles to capitalize on the previous day's solid recovery of over 200 pips from a fresh one-month low and comes under some renewed selling pressure during the Asian session on Friday. Expectations that the Federal Reserve will adopt a less hawkish stance in the wake of worsening economic conditions exert heavy downward pressure on the US Dollar (USD), which, in turn, is seen weighing on the major.
Meanwhile, multi-billion dollar lifelines for troubled US and European banks helped ease concerns about widespread contagion, especially after last week's collapse of two mid-size US banks - Silicon Valley Bank and Signature Bank. Investors, however, are still trying to determine whether the risk of a full-blown global banking crisis has been tamed. The uncertainty benefits the safe-haven Japanese Yen (JPY) and contributes to the USD/JPY pair's slide.
It is worth mentioning that large US banks came to the rescue of troubled First Republic Bank and injected $30 billion into the California, San Francisco-based lender on Thursday. This followed Credit Suisse's announcement that it will exercise an option to borrow up to $54 billion from the Swiss National Bank (SNB) to shore up liquidity. The developments did help improve market sentiment, which might keep a lid on any further gains for the JPY.
Adding to this, growing acceptance that the Bank of Japan (BoJ) will stick to its dovish stance to support the fragile domestic economy could limit losses for the USD/JPY pair and warrant some caution for aggressive bearish traders. In fact, the incoming BoJ Governor Kazuo Ueda recently stressed the need to maintain the ultra-loose policy settings and said that the central bank isn't seeking a quick move away from a decade of massive easing.
Adding to this, the outgoing BoJ Governor Haruhiko Kuroda said this Friday that there is room to cut interest rates further into negative territory from the current -0.1%. This, in turn, supports prospects for the emergence of some dip-buying around the USD/JPY pair ahead of the crucial FOMC monetary policy meeting, starting next Tuesday. In the meantime, traders on Friday might take cues from the release of the Michigan US Consumer Sentiment Index.
From a technical perspective, this week's repeated failures to find acceptance below the 50% Fibonacci retracement level of the recent rally from the January monthly swing low also warrant caution for bearish traders. The said support is pegged near the 132.55 area and should protect any further intraday slide. The next relevant support is pegged near the 132.20 area, below which the USD/JPY pair could weaken below the 132.00 round figure and retest the overnight swing low, around the 131.70 region. Spot prices could eventually drop to 61.8% Fibo. level, around the 131.30 area. Some follow-through selling below the 131.00 mark will confirm a fresh breakdown and pave the way for an extension of the downward trajectory witnessed over the past two weeks or so.
On the flip side, the 38.2% Fibo. level, around the 133.80-133.85 region, nearing the overnight and the Asian session peak, now seems to have emerged as an immediate strong barrier. The said barrier should act as a pivotal point for the USD/JPY pair, which if cleared decisively might prompt some short-covering move. Spot prices might then accelerate the recovery momentum towards reclaiming the 135.00 psychological mark en route to the 135.40 confluence hurdle, comprising the 23.6% Fibo. and the 100-day Simple Moving Average (SMA).
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