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The foreign exchange market functions in the form of currency pairs: currencies paired with one another. For example, the US dollar (USD) paired with the Japanese yen (JPY) establishes the USD/JPY currency pair. There are, of course, a number of different currency pairs in the FX market, generally categorised as either major currency pairs, minor currency pairs or exotic currency pairs. The USD/JPY is considered a major pair, formed of two liquid and popular currencies from developed countries (note that all major currency pairs include the US dollar, either as a base or quote currency).
For those new to the Forex market, a currency pair consists of a base currency, the first currency listed in a quotation and always represents 1 unit, and a quote currency, which determines the value of the base currency in terms of the quote currency. Therefore, sometimes, you may also see the quote currency referred to as a term currency.
2023 has been quite the year for the USD/JPY. How one navigates and ultimately generates trading decisions for the pairing, or any financial market, depends on several factors, though there are two vehicles of analysis widely employed.
Two primary ways of analysing and trading the financial markets exist: technical analysis and fundamental analysis.
The two methods are often combined to offer a broader view of both the economic and technical landscape. However, it is true that there are steadfast technical analysts who operate successfully with no more than taking into consideration what time/date major economic events are released (which could potentially influence their trades). Such events are regularly labelled as either high-impacting events or tier-1 risk events; both mean the same thing: economic data that can affect the price of a currency pair and, thus, can affect any active trades.
Technical analysis is a broad concept that aims to identify trading opportunities through the assessment of things like historical price action, volume and volatility studies, pattern analysis and technical indicators.
Analysing price action is a common method among technical traders. This can range from basic Japanese candlestick analysis to more advanced concepts involving support and resistance. How one chooses to implement this form of analysis will be down to the individual trader or investor.
Support and resistance in the USD/JPY can be determined in several ways, from more objective approaches, such as psychological price levels and pivot points, to subjective methods that require chart experience, as well as countless hours of back-testing and forward-testing.
A basic example of employing price action is through the use of psychological numbers along with trend studies. Using the H1 timeframe on the USD/JPY (below), all the major round numbers are applied, and the trend is to the downside: a series of lower lows and lower highs. Some technical traders may execute sell (buy) positions on a breakout below (above) a round number in alignment with the immediate trend (importantly, some traders may wait and see if a retest of the breached level occurs before committing to avoid a false breakout signal; one example of a bearish breakout and retest has been labelled on the chart below).
Fundamental analysis, or macroeconomic analysis, for many FX traders, begins with understanding the central bank’s guidance, monetary policy and fiscal policy. In the case of this article, traders/investors would focus on the US Federal Reserve (Fed) and the Bank of Japan (BoJ).
Guidance from the said central banks is widely followed; policy statements are scrutinised for clues about future rate decisions. Central banks detail projections for important economic indicators and highlight what economic data they will be monitoring. Another point to add is that market participants pay great attention to what central bank officials say in the financial press and when participating in things like panel discussions. If their comments, along with incoming economic data, align/conflict with the central bank’s guidance, this can increase volatility in the USD/JPY and create tradeable opportunities. With a macro picture understood, many traders and investors tend to then turn to technical analysis to assess when to make a trade, not only helping with entry into the market, but also with risk management.
Macroeconomic indicators which usually garner the most attention are inflation (CPI and PPI as well as PCE numbers), Gross Domestic Product (GDP) for growth and unemployment indicators.
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