Bearish view
- Sell the USD/JPY and set a take-profit at 125.
- Add the stop-loss at 129.
- Timeline: 1-3 days.
Bullish view
- Set a buy-stop at 129 and a take-profit at 131.
- Add a stop-loss at 127.
The USD/JPY exchange rate plunged to a low of 127.82, the lowest point since May last year as investors waited for the upcoming Bank of Japan (BoJ) decision. It has been in a remarkable sell-off, in the past few weeks, having crashed by over 15% from the highest point in 2022.
BoJ decision ahead
The USD/JPY price crashed hard after the US published the latest consumer inflation data. According to the Bureau of Labor Statistics (BLS), the country’s inflation retreated for the sixth straight month in December.
The headline consumer price index (CPI) dropped from 7.1% in November to 6.5% in December as goods inflation retreated. Core inflation, which excludes the volatile food and energy products, declined to 5.7% in December.
Therefore, the US dollar index plunged as investors predicted that the Federal Reserve will continue with its interest rate pivot. The bank has already slowed the pace of rate hikes from 0.75% to 0.50% and analysts expect that this trend will continue.
The USD/JPY price also declined ahead of the upcoming BoJ decision that is scheduled for Wednesday this week. With Japan’s inflation surging, analysts believe that the BoJ will intensify its hawkish tone as it shifts its tone. The BoJ, together with China’s PBoC, are the only major central banks that have avoided raising rates in the past year.
In its last meeting, the BoJ decided to adjust its yield curve control program that pegged the yield of 10-year yield at zero. It did that by allowing the yield to fluctuate to 50 basis points. Now, traders are betting that the bank will scrap the yield curve control program that has existed in the past decades. The BoJ spent about 5% of Japan’s GDP defending the yield target in December alone. This week’s decision will be important because it comes at the final month’s of Kuroda’s tenure.
USD/JPY forecast
The daily chart shows that the USD/JPY exchange rate has been in a strong bearish trend in the past few days. In this period, it has formed a descending channel that is shown in black. The pair is also about to form a death cross, which happens when the 200-day and 50-day moving averages crossover.
Oscillators like the MACD and the Relative Strength Index (RSI) have drifted lower. Therefore, the pair will likely continue falling as sellers target the key support at 125.
