The USD/JPY price retreated sharply in the overnight session after Japan announced a major stimulus package. The pair dropped to 114.00, which was about 1% below its highest level this week.
Japan stimulus
The USD/JPY pair dropped sharply after Japan announced a new set of stimulus as the government seeks to support a struggling economy.
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In a statement, the government said that it will spend more than $350 billion to stimulate the economy. This fund will include sending about $872 to households with children who are younger than 18 years. This package comes in addition to the $770 billion the government has spent since the pandemic started.
The government’s goal is to stimulate the economy and avoid deflation. Indeed, recent data have sent a picture of an economy that is struggling. For example, inflation remains below 1%.
And data published on Wednesday showed that its exports and imports expanded at a slower pace than expected. They both roe by 9.4% and 26.7%, leading to a trade deficit of more than 67.4 billion yen. Japan also published weak GDP data.
The new stimulus is also notable since it comes at a time when other governments are unwinding their stimulus packages. For example, in the United States, the Federal Reserve has announced that it will end quantitative easing in the coming months. It has already started tapering.
Still, there are concerns for the country’s economy. For one, the previous checks did little to boost inflation and spending. Instead, many people decided to use the money as savings. Indeed, analysts believe that 70% of the past stimulus ended up as savings.
Another concern is that the country has a massive debt load that is about 266% of its GDP. This makes it one of the most highly indebted countries in the developed world.
USD/JPY forecast
The USD/JPY pair has been in a strong bullish trend in the past few weeks. This saw it soar to a multi-month high of more than 114. It even managed to cross the key resistance level at 114.70, which was the previous year-to-date high.
The pair then declined sharply after the new stimulus deal. This drop is part of the formation of the handle section of the cup and handle pattern. It is also slightly above the 50-day moving average. Therefore, the pair will likely bounce back in the near term as the market reflects on the stimulus.
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