USD/JPY prediction as the Japanese yen sell-off intensifies

on Jan 4, 2022
  • The USD/JPY pair jumped to a multi-year high on Tuesday.
  • The rally happened as concerns about the Fed and BOJ divergence happened.
  • We explain what to expect in the near term.

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The USD/JPY surged to the highest level since January 2017 as investors predicted a widening divergence between the Fed and the Bank of Japan (BOJ). The pair has risen by about 15% above its lowest level in 2020.

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Japanese yen sell-off 

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The Japanese yen has been in a strong bearish trend against the US dollar in the past few months. This sell-off is mostly because of the structural differences between the economic recovery of the United States and Japan.

In a recent report, Japan’s Ministry of Finance upgraded the country’s economic outlook for 2022 to 3.2%. On the other hand, according to the Conference Board, the American economy is expected to grow by 3.5% in 2022.

There are other differences as well. The US has an unemployment rate of about 4.2% while Japan’s unemployment rate has stayed below 3% for months.

Most importantly, Japan’s inflation has consistently remained below the 2.0% target set by the BOJ. And there are signs that inflation will remain under pressure even as energy prices jump. Historically, Japan’s consumer spending has been weak because of the ageing population. Most retailers are often afraid of hiking prices.

The situation is different in the United States, where inflation has jumped to a multi-decade high of more than 6%. 

Therefore, analysts believe that the Federal Reserve will embrace a more hawkish tone in 2022. It has already hinted that it will hike interest rates three times this year. It will also end its quantitative easing policy in the first quarter.

The BOJ, on the other hand, is expected to continue with its dovish stance. That will include keeping rates low and continuing with the asset purchase program. In a note, an analyst at JP Morgan said:

“The dollar-yen tends to rise until the Fed raises rates and fall when it actually happens. It is seen rising to around 117 around mid-2022 and peaking when the U.S. starts raising rates.”

USD/JPY forecast

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The daily chart shows that the USD/JPY has been in a strong bullish trend in the past few months. It has managed to rise above the 25-day and 50-day moving averages. It is also appriaching the upper side of the ascending channel that is shown in red. The Relative Strength Index (RSI) has also moved above the overbought level. 

Therefore, while the path of the least resistance is higher, a bearish breakout cannot be ruled out when the pair tests the upper side of the channel.


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