Hawkish statement from Ueda over the weekend sent JPY higher

The past weekend has not been regular for financial market participants as the Japanese yen (JPY) gapped higher.

Currency markets are closed over the weekend, leading many to believe that the opening prices next Monday will be the same as the closing ones on the previous Friday. While this is true most of the time, sometimes events over the weekend may take markets by surprise.

Whenever that is the case, the opening levels on Monday are way different than the closing ones on Friday. It is said that a gap formed.

This was the case this weekend.

In a stunning move, the Bank of Japan’s Governor, Kazuo Ueda, hinted that negative rates may come to an end sooner rather than later. As a result, the JPY gapped higher across the board.

Unsurprisingly, the news sent the JPY higher and yields higher, too. After the hawkish comments, Japan’s 10-year yield surged to the highest in almost ten years. It topped 0.7% for the first time since 2014, and swap rates trend higher as well.

Although it traded with a bullish tone in the past weeks, signs existed that the USD/JPY exchange rate might reverse. More precisely, two bearish patterns hinted at a possible reversal before this weekend.

One was a rising wedge, still in progress. Rising wedges signal a reversal as the market keeps forming higher highs but only marginal ones. Once it breaks below the lower trendline, the downward pressure should intensify.

Another was a bearish divergence with the RSI, visible for quite some time now. The oscillator did not confirm the recent highs; thus, the bias was bearish even before Ueda’s comments.

All in all, it should be a bumpy road for JPY bulls. Gaps tend to be closed, and this one will probably be too.

However, it depends on the timing of when the market will close the gap. Given the fact that the US inflation and the Fed’s decision are due in the days ahead, the gap may remain open more than usual.

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