USDJPY reached a high of 129.40 on Wednesday and has been consolidating since then. The pair is now heavily overbought on multiple timeframes, so some consolidation is welcomed.

In this sense, traders should also watch for the risk of an oversized correction down (especially considering that stocks are falling and the BOJ meets on Thursday). As we know, markets don’t move in a straight line. So oftentimes, sharp moves in one direction can be followed by sharp corrections in the other direction. While the bull-trend remains intact, a mere 38.2% Fib retracement of the rally since early March would mean a further 400 pips downside correction (USDJPY under 124.00).

Today USDJPY has broken the rising trendline that supported the rally since April 1. This could be the first signal for the start of such a deeper correction. The short-term 9-day moving average is near, at 127.20. If that goes too, then the selling could accelerate and quickly take USDJPY to 125.00.

To the upside, 130 is the obvious level to watch. It was not reached on the last move up, but another bullish attempt may as well achieve that. How USDJPY would react in this scenario is very hard to say at this stage, and would probably depend on how the BOJ reacts (whether they accept or fight the 130.00 mark).

It was another strong week for the US dollar, with the DXY index now pushing firmly above 101. These are the strongest DXY levels since March 2020, when the pandemic-induced crisis triggered a severe shortage of dollars in global markets.

The past and this week are a quiet period ahead of the busy first week of May that features, among else, the Fed meeting and the Nonfarm payrolls report. Thus, without anything that can alter the longer-term Fx drivers, the markets’ focus is fixated on the divergence between the hawkish Fed and other central banks that are either less hawkish or outright dovish (e.g., BOJ). This policy divergence is and will likely continue to push the dollar higher in the coming weeks.

And unlike in the 2020 Covid crisis, when the Fed stepped in to flood the markets with dollars, which effectively killed the rally, this USD bull trend is an entirely different beast. With US inflation at record 40-year highs and the economy booming, the Fed very much welcomes USD strength. Liquidy is also not an issue today. This means that the DXY index can as well surpass the 2020 highs around 103.

The focus on the US calendar this week is on Thursday’s GDP release and Friday’s PCE inflation report. While both data pieces are important, no big surprises are expected, at least none that will alter the Fed’s path to tighten aggressively. Thus, no sizable market impact on the USD is likely from the reports.

The yen extended the slide last week, with USDJPY reaching 20-year highs. The decline inspired more discussions about the yen from Japanese officials, and again, they mainly repeated the same message - that a weaker yen is good for the economy, but sharp declines like the current one are undesirable.

This can be interpreted to mean that the trend of JPY weakness is set to continue, but the risks for a correction in the near term have risen. The yen has weakened by more than 10% versus the dollar in less than two months. That is a steep decline, and Japanese officials may not want to see USDJPY trading above 130.00 so soon.

The Bank of Japan meets on Thursday, and this could finally be a meeting where they could cause some volatility. They will certainly talk about the recent JPY weakness and what they plan to do (or not do) about it. A lot of focus will also be on their QE and YCC policies, which are the primary reason for JPY’s decline.

The risks to bearish JPY positions are that the BOJ will announce some changes to the YCC policy. Effectively, they can curb or slow down yen weakness in this way. With the market having moved by so much already and JPY pairs heavily overbought, the risks are that we could see a big corrective reaction on any such announcement from the BOJ.