On Monday, the pair actively declined, losing nearly 150 pips during the day. However, sellers were unable to break through the support level at 154.70 (Kijun-sen line on the D1 chart), after which buyers took the initiative again. The trading day closed at 155.45, and on Tuesday, the pair continued to recover from its losses.
Looking at the weekly chart, we can see that the pair has been in an upward trend since early October, when the price was in the mid-149 range. Just a few weeks later, in November, buyers reached an 11-month high at 157.90. However, traders were unable to enter the 158 zone and could not maintain their positions. Amid the general weakening of the U.S. dollar, the pair retreated.
The question arises: can we now speak of a trend reversal? Or is this still a correction?
First of all, it is essential to note that the eight-week USD/JPY bullish marathon was accompanied by sufficiently deep price pullbacks. For example, in early November, the pair fell by more than 100 pips over the course of one week, but buyers quickly regained all those losses, and the upward trend resumed. Therefore, the current retracement does not seem extraordinary and is not a definite sign of reversal.
Secondly, buyers of USD/JPY have currently negated almost all intraday losses. It is also essential to highlight one important point. Monday's bearish momentum in the pair was not due to a weakening of the greenback but rather to a strengthening of the yen, which reacted to the hawkish rhetoric of Bank of Japan Governor Kazuo Ueda. The governor hinted that the central bank might raise interest rates at the December meeting in response to recent CPI reports.
Notably, Ueda specifically emphasized that he is "in constant communication with the government." The current Prime Minister Sanae Takaichi is a proponent of ultra-loose monetary policy, but the central bank head has made it clear that he has convinced the government leader that an interest rate increase is necessary.
It is worth recalling that last week's Tokyo consumer price index, a leading indicator of nationwide price dynamics, was favorable for the yen. The overall CPI in Tokyo slightly slowed to 2.7% in November, down from 2.8% in October. Excluding fresh food prices, the index remained at October's level (2.8%), while most analysts had predicted a decline to 2.7%.
To reiterate, these are preliminary "leading" figures for November. The national consumer price index for Japan for November will be published later this month. In October, the national CPI increased to 3.0%, the highest level since July of this year. The CPI index excluding fresh food also accelerated to 3.0%, marking a two-month increase after a prolonged decline. The consumer price index excluding fresh food and energy rose to 3.1% year-on-year in October, increasing from the previous value of 3.0%.
In other words, inflation in Japan continues to strengthen and remains above the central bank's target, reinforcing the case for further monetary policy tightening. Therefore, the hawkish comments made by Ueda on Monday fit harmoniously into the existing fundamental picture.
However, despite these hawkish signals, USD/JPY sellers were unable to maintain their positions. This indicates that market participants have effectively priced in the BoJ's likely interest rate hike at the December meeting. Thus, any "confirming" news has only a short-term impact on USD/JPY. The market acted on Ueda's hawkish comments within a single day.
This means that the U.S. dollar will set the tone for trading. The American currency is awaiting key macroeconomic reports this week. On Wednesday, the ADP report and the ISM services index will be published, and on Friday, the core PCE index and the University of Michigan consumer sentiment index will be released. If these indicators are in the green zone, USD/JPY may return to the 157 figure area again. Otherwise (if the above reports are in the "red zone"), the pair may return to the range of 154.70 to 155.40 (the Kijun-sen line – the middle line of the Bollinger Bands on the daily chart).
From a technical perspective, the pair is positioned between the middle and upper lines of the Bollinger Bands indicator on the D1 time frame, above the Kumo cloud and the Kijun-sen line, but below the Tenkan-sen line. Long positions should be considered only after the pair surpasses the Tenkan-sen line (156.20) – in this case, the Ichimoku indicator would form a bullish "Parade of Lines" signal. The first target for the upward movement is at 156.80 (the upper line of the Bollinger Bands on the H4 time frame), and the main target is 157.80 (the upper line of the Bollinger Bands on the D1 time frame).
