For three consecutive trading sessions, the USD/JPY currency pair is trying to compensate for some of its recent sharp losses, which affected the 137.23 support level. This is the lowest for the currency pair in two months, with the US dollar being negatively affected by a stronger than expected decline in US inflation figures. The gains of the recent rebound did not exceed 139.40 level, which is closest to testing the psychological resistance 140.00 again, and the currency pair stabilizes around 138.68 at the time of writing.
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In general, the big story in the forex market in the past two years has been the steady decline of the Japanese yen. This came because the Bank of Japan was an outlier among other global central banks - the only bank not to raise interest rates after the COVID-19 pandemic and soaring inflation. As a result, the Japanese yen lost ground across the forex rate board. According to a recent article in the Financial Times, the Japanese yen rate is following the US/Japanese interest rate gap.
As such, it is not surprising that the USD/JPY exchange rate rose to 150 in the latter part of 2022 after trading below 110 just a year later. Similar market movements may be seen on other currency pairs, such as EUR/JPY or GBP/JPY.
In other words, the interest rate differential works at the expense of the Japanese yen, and fighting the trend has been costly for contrarian traders.
But the big question now is, what happens next?
The US Federal Reserve has already paused raising US interest rates. Inflation is dropping rapidly. And if the US changes course and lowers the money rate later in the year or early 2024, the interest rate gap between the US and Japan will narrow rapidly.
So… will the USD/JPY exchange rate fall as well?
Last October, USD/JPY jumped to a new record high above 152 and while the recent drop from 144 was quite surprising, buyers are likely to emerge again. The technical picture favors a new high above the 152 resistance while the market holds above the 132 support area. The ascending triangle broke up in the first half of the year, then the market rebounded. When the 132 level is provided as a stable support, the path is for the market to make a new high.
On the way up, it must overcome the pivot level of 144. In such a move, more buyers must appear, and a new high must come quickly. Fundamentals also favor a higher exchange rate. As the weakness of the yen reflects the loss of competitiveness of Japanese exporters. Weak domestic demand is also not helping, and the BoJ's actions are likely to only have a temporary effect. In real terms, the Japanese yen is the weakest in 50 years. Household spending is about the same as it was a decade ago, suggesting that a weak currency is contributing to a weak economy. The shrinking interest rate gap between the US and Japan may not be enough to bring down the USD/JPY exchange rate as easily as it has risen. As such, the trend in the short and medium term remains for the exchange rate to rise to new highs.
Forecasts of the US dollar against the Japanese yen today:
- According to the performance on the daily chart below, the return of stability in the price of the US dollar against the Japanese yen, USD/JPY, above the resistance 140.30, will give the bulls the opportunity to launch upwards again.
- The divergence between the policy of the Central Bank of Japan and the US Federal Reserve Bank will remain in favor of the strength of the upward trend in the future.
- I still prefer to buy the dollar / yen pair from every downward level, and the closest support levels for the currency pair are currently 137.60 and 136.00, respectively.
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