USD/JPY Technical Analysis: Investor Sentiment Cautious

The Japanese yen outperformed before last weekend and continued to build a growing fan club of bullish followers in recent trading. With the Federal Reserve's decision on a potentially hawkish US interest rate, the currency could be at risk from a setback this week. The bulls were not able to push the price of the currency pair USD/JPY higher than the resistance of 131.11. After that, the trading went down on the threshold of the support of 129.02 and closed the last week's trades stable around the level of 129.83.

Japan's exchange rate rose in trading on Friday after inflation rose more than expected in Tokyo for January in a result widely seen as foreshadowing another move in national inflation rates when they are announced at the end of February. Accordingly, Christina Clifton, chief economist and forex analyst at the Commonwealth Bank of Australia, says: "The strong rise in the consumer price index in Tokyo for the month of January (January) adds to the case of starting the process of unwinding the very lenient monetary policy."

The analysts added that rising inflation and continued speculation about the Bank of Japan's (BoJ) monetary policy are likely to offset the usual negative effects of the additional quantitative easing implemented by the Bank in order to maintain the yield curve control program. For its part, the Bank of Japan maintained its commitment to purchase unlimited amounts of Japanese government bonds in order to impose the 0.5% upper limit imposed on the 10-year yield as part of the yield curve control program, and intervened repeatedly for this purpose throughout January.

While the yen rose against all of its G20 counterparts on Friday, it has underperformed for the week overall and is known to be vulnerable to recent increases in yield on soft U.S. government bonds and this week's Fed decision could be an upside risk to U.S. borrowing costs. That's after several members of the Federal Open Market Committee (FOMC) acknowledged the apparent slowdown in the U.S. economy in public remarks made throughout January, but also warned that additional rate hikes are likely to be necessary in the coming months.

While there has been no shortage of bad economic numbers coming out of the United States in recent weeks, the preliminary estimate of gross domestic product for the last quarter was much stronger than many economists expected, and several official indicators suggest the labor market remains resilient. This increase in the monthly rate of inflation in December is one of the reasons why the Federal Reserve Bank may take borrowing costs above the 5% level that the financial markets have identified as the possible peak for the coming months.

Technical analysis of the USD/JPY pair:

• In the near term and according to the performance on the hourly chart, it seems that the USD / JPY currency pair is trading within the formation of a coherent triangle.
• This indicates the absence of a clear directional bias in market sentiment.
• Therefore, the bearish speculators will target profits at around 129.154 or lower at the 128.437 support.
• On the other hand, the bulls will look to pounce on profits at around 130.571 or higher at the 131.348 resistance.

In the long term and according to the performance on the daily chart, it seems that the USD / JPY currency pair is trading within the formation of a descending channel. This indicates a significant long-term bearish bias in market sentiment. Therefore, the bearish speculators will look to extend the current path of declines toward the 126.911 support or lower to the 123.991 support. On the other hand, the bulls will look for a rebound at around 132.332 or higher at the 134.835 resistance.