USD/JPY fluctuates around 128.50, awaiting BOJ decision

• The risk aversion momentum and speculation that the Bank of Japan will abandon its YCC are headwinds for USD/JPY.
• The New York Fed’s Empire State Manufacturing report reported further deterioration in the region, sparking fears of recession,
• USD/JPY Price Analysis: Failure to break above 129.40 compounded the slide below 129.00.

The USD/JPY It is holding on to its earlier gains at the start of the North American session, though it is pulling back after hitting daily highs of 129.16 before the Wall Street open. The US dollar (USD) is giving back earlier gains as sentiment continues to deteriorate. At the time of writing, the USD/JPY pair is trading at 128.46, up 0.11%.

A dollar offered, a headwind for USD/JPY

Wall Street will open lower as US stock futures remain in negative territory. The greenback is in free fall, as the Dollar Index shows, down 0.57% to 101.984. The 10-year US Treasury yield, which is typically closely correlated to USD/JPY, pared its gains to 3.535%, unchanged.

The US Empire State Manufacturing report released by the New York Federal Reserve reported a sharp contraction in business activity, with the index falling 22 points to -32.9 points. The Inform showed that new orders and shipments declined substantially, while delivery times remained unchanged and inventories pointed higher.

Despite the worse-than-expected data, the USD/JPY reaction was subdued as traders braced for the Bank of Japan’s two-day monetary policy decision.

Expectations of a rate hike are very low, although they shot up 45% at the March meeting. Market analysts believe that the BOJ could drop its Yield Curve Control (YCC) to prepare markets for its first rate hike at the March or April meeting.

On the US economic agenda, the president of the New York Fed, John Williams, crosses paths with the media. On the Japanese front, the Reuters Tankan Index, Machinery Orders and the long-awaited Bank of Japan monetary policy decision will entertain USD/JPY traders.

USD/JPY Price Analysis: Technical Insights

During the European session, USD/JPY hit a daily high of 129.16 before matching those gains. The rally stalled below last Friday’s high of 129.42, exacerbating the decline towards 128.50. Hence, price action to the downside, oscillators like the Relative Strength Index (RSI) holding in bearish territory, and the Rate of Exchange (RoC) pushing further lower paved the way for further losses.

Therefore, the first support for USD/JPY would be 128.00, followed by the January 16 daily low at 127.21 and the May 24 pivot low at 126.36.