USD/JPY accelerates the downfall to 128.00 mark, hits its lowest level since late May

The USD/JPY pair breaks down from its intraday consolidative range and drops to the lowest level since late May during the early part of the European session. The pair currently trades just above the 128.00 mark and seems vulnerable to extending its depreciating move.

The US Dollar struggles to capitalize on its modest recovery and languishes near a seven-month low, which, in turn, drags the USD/JPY pair lower for the second straight day. The US consumer inflation figures released on Thursday reinforced expectations that the Fed will soften its hawkish stance. Adding to this, several FOMC members backed the case for a smaller 25 bps lift-off in February and continue to weigh on the Greenback.

The Japanese Yen, on the other hand, draws support from speculations that the Bank of Japan (BoJ) could unwind its ultra-loose monetary policy in 2023. Furthermore, reports on Thursday indicated that BoJ will review the side effects of its ultra-loose policy and may take measures to correct distortions in the yield curve. This, in turn, pushes the 10-year Japanese government bond to the highest since mid-2015 and provides an additional lift to the JPY.

The sell-off around Japanese government bonds forces the BoJ to announce two rounds of emergency buying. This, along with extremely oversold conditions on intraday charts, could help limit any further losses for the USD/JPY pair, at least for the time being. Market participants now look forward to the US economic docket, featuring the Preliminary Michigan Consumer Sentiment Index for a fresh impetus later during the early North American session.

From a technical perspective the pair continues falling in a descending channel which began back at the October 2021 highs, and this downtrend is expected to extend in the absence of reversal insignia.

USD/JPY price is closely respecting the tramlines of this channel as evidenced by the breakdown after the last test of the upper channel line on the day prior to the release of US December CPI. It is now declining back down to towards the lower channel line which is expected to be reached when price gets to around the 126 level (also a key trough low from May 2022), assuming the present move maintains a steady pace. At that point there will probably be a plateauing before the next corrective leg, unless selling pressure is so intense it pushes the exchange rate below the lower channel line.

Till it gets there, and in the short-term, traders should look for opportunities to short on lower timeframes. 

Technical levels to watch