USD/JPY: forecast for the pair amidst BoJ defence of bond target

Tapering is not an option for the Bank of Japan. Concerned about a potential rise in domestic borrowing costs, the central bank announced that it would buy unlimited amounts of 10-year government bonds.

The Bank of Japan (BOJ) made a surprise announcement last week. It said it would buy unlimited amounts of 10-year government bonds at 0.25%, a move designed to counter the global rise in yields. In other words, no tapering in sight at the BOJ.

The BOJ is concerned that rising yields will drive up domestic borrowing costs. At the same time, the central bank has not hesitated to express its fear that the current weakness of the yen will hold back the economy.

Because the Japanese yen acts as a safe haven currency, its volatility is often unaffected by central bank decisions. Instead, it moves mainly in response to risk-on/risk-off sentiment in the financial markets.

For example, on Friday, during late trading hours, rumours that a Russian invasion of Ukraine is imminent sent stocks down and the Japanese yen up. This had nothing to do with the BOJ's decisions but with the market's risk averse sentiment.

USD/JPY unable to hold above 116 - is a double top in place?
The USD/JPY currency pair recovered during the COVID-19 pandemic. It went from 102 to 116 without any pullback.

However, since the beginning of 2022, the market seems tired. It is unable to hold above 116, where it has been rejected twice.

Therefore, technical traders could say that a possible double top pattern has formed at 116. Even though the neckline has not yet been broken, the market's inability to hold above 116 implies that a reversal may be imminent.

In addition, a possible ascending wedge is in the works. If USD/JPY does an ascending wedge instead of a double top, then another attempt of 116 is possible, without the market breaking below the neckline of the double top.

Overall, the market looks tired as it has only made marginal new highs recently. The double top and ascending bevel patterns are bearish and favour a reversal.

Conservative traders may want the market to close below 114 before selling short. A close below the neckline would suggest that a top is in place and another move towards 116 is out of the question.