USDJPY has been trending lower on its longer-term time frames, moving inside a descending channel on its daily time frame. Price is currently testing the channel resistance at the 106.50-107.00 area, which lines up with a former support level. This also coincides with the 61.8% Fibonacci retracement level based on the latest swing high and low.
The top of the channel is close to the 100 SMA, which could act as a dynamic resistance zone. This is below the longer-term 200 SMA, confirming that the downtrend could carry on and that the path of least resistance is to the downside. The gap between the moving averages is widening, reflecting stronger bearish momentum.
Stochastic is indicating overbought conditions and is turning lower, indicating a return in selling pressure. In that case, USDJPY could resume its drop to the channel support around 98.50 or at least until the 100.00 major psychological support level.
The main event risk for this setup is the BOJ decision towards the end of the week, as market participants still have mixed expectations for the outcome. Earlier in the month, PM Abe ordered the preparation of an economic stimulus package, leading traders to expect that the central bank would be ready to dole out more easing as well. However, BOJ Governor Kuroda suggested that “helicopter money” might not be the case.
Still, in the G20 meeting, Kuroda mentioned that ruling out “helicopter money” doesn’t necessary mean that additional stimulus would be improbable. With that, market watchers are back to pricing in additional easing from the central bank, probably somewhere between 10-30 trillion JPY.
As for the US dollar, the advanced GDP reading is up for release this week and a stronger figure for Q2 is eyed. The FOMC is also scheduled to announce its policy decision this week but no actual changes in interest rates are expected, although any indication that the Fed could still tighten this year might drive dollar gains.