USD/JPY forecast: what next for the falling Japanese yen?

The Japanese yen remained under intense pressure today, July 23, as traders rushed to the US dollar amid the rising tensions in the Middle East. The USD/JPY pair was trading at 163.07, a few pips below this week’s high of 163.2. 

Japanese yen crash is continuing

The Japanese yen has continued falling this month, even as the country’s central bank has launched several defensive measures. 

The Bank of Japan has hiked interest rates to the highest level since 1995, and hinted that it may deliver more increases. 

At the same time, the bank has spent more than $73 billion on foreign exchange market interventions. While these interventions typically trigger a stronger yen, the gains have historically been short-lived.

The Japanese yen has mostly dropped because of the significant gap that exists between the US and Japanese interest rates.

Japanese rates have jumped to 1%, while in the United States, the Fed has left them unchanged between 3.50% and 3.75%. Economists and traders now expect the Fed to hike rates further this year as inflation concerns remain. Odds of a Fed hike have jumped to over 67% on Polymarket.

Higher interest rates in the United States have made the US dollar more attractive than the Japanese yen. They have also fueled the popularity of the USD/JPY pair among carry traders, who borrow in low-interest-rate currencies to invest in higher-yielding ones.

The ongoing crisis in the Middle East has contributed to the ongoing Japanese yen sell-off because the country depends substantially on oil coming from the region. In a statement, an Iranian official said that the crisis would escalate. He said:

“If the Americans target a bridge or a power plant in Iran, Iran will, in turn, strike infrastructure and bridges in the region, including energy facilities where the United States has interests.”

Data shows that Brent and the West Texas Intermediate (WTI) continued rising overnight as the crisis continued. Also, Houthis hit an oil tanker attempting to cross the Bab El-Mandab Strait. Brent jumped to $96, while the West Texas Intermediate (WTI) approached the key resistance at $90. These events have fueled the US dollar gains as investors rush to its safety.

USD/JPY technical analysis

USD/JPY chart | Source: TradingView

The daily chart shows that the USD/JPY pair has continued rising in the past few months. These gains have been supported by the 50-day Exponential Moving Average (EMA). 

The pair has recently crossed the important resistance level of 162.82, its highest level on July 1. It also remains above the Supertrend indicator. 

Therefore, the path of the least resistance for the pair is bullish, with the next key level to watch being at 164. A move above that price may see it hit the resistance at 165 over time.