USD/JPY Outlook: BoJ-inspired slump marks a fresh bearish breakdown below 200-day SMA

The USD/JPY pair came under heavy selling pressure during the Asian session on Tuesday and dived to over a four-month low after the Bank of Japan (BoJ) announced its policy decision. In an unexpected hawkish twist, the Japanese central bank widened the allowable trading band for the 10-year government bond yield to 50 bps on either side of the 0% target from the 25 bps previous. The move is seen as a step towards the policy normalisation process. The BoJ, however, maintains its guidance to ramp up stimulus as needed and projects that interest rates will move at current or lower levels. Nevertheless, the surprise announcement, along with the prevalent risk-off environment, boosts the Japanese Yen.

The market sentiment remains fragile amid worries that a surge in COVID-19 infections in China could delay a broader reopening in the country. To a more significant extent, this overshadows the recent optimism led by the easing of strict lockdown measures in China. Apart from this, the protracted Russia-Ukraine continues to fuel concerns about a deeper global economic downturn and tempers investors' appetite for riskier assets. The anti-risk flow is evident from an extended sell-off in the equity markets, which, in turn, benefits the traditionally safe-haven Japanese Yen. On the other hand, the US Dollar is seeing a mixed performance against its major counterparts and fails to impress bulls or lend any support to the USD/JPY pair.

That said, a goodish pickup in the US Treasury bond yields, bolstered by a more hawkish commentary by the Fed last week, might continue to act as a tailwind for the greenback. It is worth recalling that the US central bank indicated that it would continue to raise rates to crush inflation. Furthermore, policymakers projected at least an additional 75 bps increases in borrowing costs by the end of 2023. This is the only factor holding back traders from placing fresh bearish bets around the USD/JPY pair. Market participants now look to the post-meeting press conference, where comments by BoJ Governor Haruhiko Kuroda might influence the JPY. Apart from this, the broader risk sentiment should provide some impetus.

Technical Outlook

From a technical perspective, a sustained break and acceptance below the important 200-day SMA could be seen as a fresh trigger for bearish traders. Some follow-through selling below the 133.00 mark, coinciding with the 50% Fibonacci retracement level of the strong 2022 rally, will reaffirm the negative bias and pave the way for deeper losses. The USD/JPY pair might accelerate the slide to the 132.15 intermediate support before eventually dropping to the 131.50 region en route to the 131.00 round figure and the 130.40-130.35 zone.

On the flip side, attempted recovery moves might now confront immediate resistance near the 134.00 mark ahead of the 134.20-134.25 region. Any further move up is more likely to attract fresh sellers near the 135.00 psychological mark and remain capped near the 135.50-135.60 horizontal zone. The latter coincides with a technically significant 200-day SMA, which should now act as a pivotal point. A sustained strength beyond, though unlikely, might negate the near-term negative outlook and prompt aggressive short-covering around the USD/JPY pair.