USD/JPY drops 200 pips from recent highs

USD/JPY fell 200 pips against the rest of the market as technical and fundamental traders bet on the rise of the yen. A bearish divergence with the RSI coupled with a rising wedge pattern, which weighs on the parity.

One of the most impressive rallies of 2021 happened in the JPY pairs. All rallied throughout the year and ended the year growing.

With the US dollar being the world’s reserve currency, the USD/JPY pair is the one closely watched by JPY traders. If desired, it leads the price action in other JPY pairs.

It recently traded as high as 116.30 but is now down sharply. Technical and fundamental traders have a reason to sell this market.

On the one hand, technical traders are watching developments closely as two bearish patterns suggest a sharp reversal. First, a bearish divergence with the RSI. Second, a rising wedge pattern.

On the other hand, fundamental traders interpret recent statements from the Bank of Japan as hawkish on the yen. Inflation is expected to rise in Japan and a weaker currency will hurt the economy, the central bank warned.

Bearish Divergence with RSI

Divergence occurs when price action deviates from what an oscillator is showing. Most divergences involve at least one oscillator, and the chart above shows the Relative Strength Index or RSI which is at the bottom.

While USD/JPY hit two highs recently, the RSI does not confirm the second. Consequently, a bearish divergence has formed, warning the bulls that the rally may stall.

Rising wedge model

Another bearish pattern visible on the same chart is a rising wedge. Wedges are up or down, bearish or bullish.

This is bearish and the focus is now on the lower edge of the pattern. A daily close below implies more weakness ahead.

Bank of Japan increasingly concerned about yen weakness

Finally, the fundamentals also favor a stronger yen. Late last year, the Bank of Japan warned that a weak JPY could hurt household incomes through price hikes .

The Bank of Japan was one of the most aggressive in easing monetary policy long before the COVID-19 pandemic gripped the global economy. He closely monitors the development of the yen and, when he speaks, investors listen to him.

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