The USD/JPY pair fell during the majority of the session on Monday, but as you can see formed enough support in order to bounce high enough and form a nice-looking hammer. This hammer is focused on the 103 level, which of course is a large, round, psychologically significant number. Because of this, it is possible this market is going to continue to grind higher, and a break above the top of the hammer is a classic buy signal.
If we get that, we should challenge the recent highs and continue towards the 105 level that traders have targeted. However, even if we pullback below that hammer, there is a significant enough amount of support near the 102 level that buyers will step in shortly after that break down. With that being the case, traders should still have this as a “buy only” currency pair, and believe that the only thing that could work against the value of this currency pair would be the fact that we are at the end of the year, and therefore in a low liquidity environment.
A tale of two central banks.
This pair is essentially a tale of two central banks. On one side of the Pacific, you have the Federal Reserve that looks like it is relatively close to tightening monetary policy. This of course is based upon the jobs numbers, which tentatively are starting to look better in the United States. The better that the employment situation gets in America, the more likely the central bank is to taper off of quantitative easing, which of course will bring up the value of the US dollar. On the other side of the Pacific, you have the Bank of Japan. They have just recently expanded monetary easing, and are nowhere near tightening their monetary policy. Because of that, the longer-term direction of this pair is higher, and this pair could quite possibly become a “buy and hold” type of long position that we used to see six or seven years ago. Traders should be very bullish of this pair.
