Technical Analysis: Bearish Flag Pattern

The AUD/JPY currency pair is currently trading within a bearish flag pattern, a technical formation that suggests the continuation of a preceding downtrend. This pattern is characterised by a steep decline (the flagpole) followed by a consolidation phase marked by parallel support and resistance lines, forming the ‘flag’. A breakout below the support level of the flag could signal a resumption of the prior bearish momentum.

Key Support Levels

As AUD/JPY approaches a potential breakdown, two critical support levels are worth noting:

1. First Support Level: Positioned around 93.59, this level represents the immediate downside target if the pair breaks below the flag’s lower boundary. A sustained move below this point could confirm the bearish continuation.
2. Second Support Level: Found at 90.13, this is a major psychological level and aligns with previous structural support from late August. A test of this level would likely attract significant market attention.

Central Bank Policies: RBA and BoJ Divergence

The policy divergence between the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) is a major driver of AUD/JPY’s bearish outlook.

• Reserve Bank of Australia (RBA): The RBA has recently shifted to a more dovish stance, keeping its cash rate steady at 4.35%. This decision reflects concerns over slower economic growth and growing confidence that inflation is trending back within the target range. The RBA has also hinted at the possibility of easing rates in 2025 if economic conditions warrant it, further weighing on the Australian dollar.
• Bank of Japan (BoJ): Conversely, the BoJ remains cautiously optimistic about its monetary policy, retaining its ultra-low interest rates while monitoring inflation and wage growth trends. Governor Kazuo Ueda has suggested that the BoJ is in no rush to adjust its policy, despite progress towards its 2% inflation target. This cautious but steady approach has supported the yen, creating further downside pressure on AUD/JPY.

Conclusion

The AUD/JPY pair appears poised for a potential breakout from its bearish flag pattern, with key support levels at 93.59 and 90.13 likely to play a pivotal role in determining the next major move. Divergent monetary policies between the dovish RBA and the cautiously optimistic BoJ further reinforce the bearish bias for this currency pair. Traders should watch closely for a decisive move below the flag’s lower boundary to confirm the continuation of the downtrend.