Break and retest forms ahead of BoJ decision

The Japanese yen has bounced back cautiously as investors wait for the upcoming interest rate decision by the Bank of Japan (BoJ). The USD/JPY is trading at 137.76, which is a few points below the year-to-date high of 140. The EUR/JPY and GBP/JPY have also retreated slightly in the past few days. 

BoJ interest rate decision

The Japanese yen has risen in the past few days as investors price in a change of mind by the Bank of Japan. The bank has gone against the grain by adopting an extremely dovish tone even as the country’s inflation rises and the currency crashes to the lowest level in over 24 years.

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A weak yen has helped to support many Japanese exporters. Indeed, many large companies that have vast business interests abroad are expected to publish strong results. However, many companies that depend on imports have come under intense pressure in the past few months. 

The BoJ has left interest rates at a negative level since 2016. It has also continued repurchasing bonds in a bid to keep government bond yields near to 0%. As a result, the BoJ has accumulated the second-biggest balance sheet after the Federal Reserve. It spent $115 billion in June to defend the bond market.

Some analysts believe that the BoJ will tweak its language when it concludes its two-day meeting on Thursday. While it will leave its monetary policy unchanged, the bank is expected to signal that it will start tightening. In a note, an analyst said:

“If the weakness of the yen becomes prolonged, and it exceeds 140 for more than three months, that could pile pressure on the BOJ to alter its monetary easing stance to avoid core CPI inflation hitting 3% this year.”

However, according to Bloomberg, the BoJ appears more determined than ever to weather political and market pressure in its pursuit of stable inflation. 

USD/JPY forecast

The four-hour chart shows that the USD/JPY pair has been in a strong bullish trend in the past few months. The pair has pulled back recently as it attempts to do a break and retest pattern. This will be confirmed if the pair manages to drop to the support at 136.91. It remains above the 50-day moving average while the Relative Strength Index (RSI) has moved below the neutral point.

Therefore, the USD to JPY price will likely resume the bullish trend and retest the important resistance at 140 before or after the BoJ decision.