USD/JPY retreats from 20-year highs and edges towards 127.70s

• The USD/JPY trimmed Tuesday’s gains, down some 0.88%.
• An upbeat market mood, Japanese Government intervention, and falling US T-bond yields weighed the USD/JPY.
• USD/JPY Price Forecast: Negative divergence in the daily chart to trigger a fall towards the 125.00 area.

The USD/JPY retreats from 20-year highs reached around 129.40, in what appears to be a profit-taking move by investors, as Japanese government officials expressed concerns about the value of the Japanese yen. Furthermore, the fall of US Treasury yields caused a drop of 170-pips. At the time of writing, the USD/JPY is trading at 127.75.

A positive market mood keeps US Treasury yields under pressure, as the appetite for riskier assets has US equities rising. Meanwhile, the greenback is down 0.68%, as shown by the US Dollar Index, which was last at 100.294.

Japanese Government officials expressed concerns about a “weaker” yen, US Treasury yields dropped

Meanwhile, Japanese officials’ efforts of verbal intervention finally came to fruition. On Tuesday, the Japanese Finance Minister Shunichi Suzuki made the most explicit warning yet that the damage to the economy from a weakening yen at present is greater than the benefits from it. Additionally, the Bank of Japan (BoJ) Governor Haruhiko Kuroda also commented that the speed of the yen’s decline could hurt the economy, though he kept its dovish stance.

The market’s reaction triggered an almost 200-pip reversal, which was also spurred by the US 10-year Treasury yield, falling from three-year highs to 2.863%, down eight basis points, a headwind for the USD/JPY. Nevertheless, despite the negative factors, the dip appears to be a corrective move due to central bank policy divergence between the Federal Reserve and the BoJ, which committed to buying 10-year Japanese Government Bonds (JGBs) at 0.25% as it advances its yield curve control (YCC).

On the US front, the US central bank is determined to keep a lid on soaring inflation and tighten its monetary policy faster. The markets have been pricing in multiple 50 bps rate hikes, as expressed by influential FOMC members - St. Louis President James Bullard, Chicago Fed President Charles Evans, and Minneapolis Fed President Neel Kashkari.

USD/JPY Price Forecast: Technical outlook

The USD/JPY illustrates the formation of a negative divergence between the price action and the Relative Strength Index (RSI) at 76.52. As the USD/JPY edged higher, the RSI peaks failed to push above the previous ones, meaning that the bullish momentum is waning.

With that said, the USD/JPY first support would be the 127.00 mark. Once cleared, it would expose April 2001 cycle high at 126.85, followed by 126.00, and then the June 2015 cycle high at 125.85.