USD/JPY Price Analysis: Bullish flag breakout in play ahead of BoJ on Thursday

• USD/JPY failed near the 100-hour SMA on Wednesday, though the downside remains cushioned.
• The overnight breakout through a descending trend-channel resistance favours bullish traders.
• Traders seemed reluctant and moved to the sidelines ahead of the BoJ meeting on Thursday.

The USD/JPY pair struggled to capitalize on the previous day's goodish bounce from the 137.40-137.35 confluence support and attracted some sellers near the 100-hour SMA on Wednesday. The pair remained on the defensive through the early North American session and was last seen trading around the 138.00 mark, just a few pips above the daily low.

A sharp intraday fall in the US Treasury bond yields resulted in the narrowing of the US-Japan rate differential. This, along with the cautious market mood, benefitted the safe-haven Japanese yen and acted as a headwind for the USD/JPY pair. The downside, however, remains cushioned, at least for now, amid a modest US dollar bounce from a two-week low.

Apart from this, a big divergence in the monetary policy stance adopted by the Bank of Japan and the Federal Reserve helped limit the downside for the USD/JPY pair. Investors also seemed reluctant to place aggressive bets and preferred to wait on the sidelines ahead of the BoJ policy decision, due to be announced during the Asian session on Thursday.

Looking at the technical picture, Tuesday's intraday rally of over 100 pips lifted the USD/JPY pair beyond a resistance marked by the top end of a short-term descending channel. Given the recent strong move up, the said channel constituted the formation of a bullish flag pattern and supports prospects for a further near-term appreciating move.

The technical set-up seems tilted firmly in favour of bullish traders, suggesting that any intraday downtick could still be seen as a buying opportunity. Some follow-through buying beyond the 100-day SMA resistance, currently around the 138.35 region, will reaffirm the constructive outlook and allow the USD/JPY pair to aim back to reclaim the 139.00 mark.

On the flip side, the 200-hour SMA, currently around the 137.70 region, now seems to protect the immediate downside ahead of the overnight swing low, around the 137.40-137.35 area. The latter coincides with the 38.2% Fibonacci retracement level of the 134.25-139.39 rally, which if broken would expose the descending channel support, around the 137.00 mark.

Failure to defend the aforementioned levels, leading to a subsequent break below the 136.80 horizontal support, would negate the near-term positive outlook and shift the bias in favour of bearish traders. The USD/JPY pair might then extend the corrective slide from a 24-year high, around the 139.40 region touched last week, and challenge the 136.00 round figure.

USD/JPY 1-hour chart

Key levels to watch