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USD/JPY price forecast amid inflation reaching a 40-year high

By:
on Nov 19, 2022
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  • Inflation in Japan climbed to a 40-year high in October, but the Bank of Japan keeps the policy unchanged
  • The Bank of Japan's intervention in the currency market contained the USD/JPY rally
  • Another attempt to 150 might be in the cards according to the Elliott Waves theory

As the end of the trading year nears, one of the most exciting market moves in 2022 was the Japanese yen’s sharp decline. All JPY pairs moved higher, but one, in particular, stands out of the crowd – the USD/JPY.

It is “the” currency” pair that everyone keeps an eye on when trading the yen. And it broke higher shortly after the Russian invasion of Ukraine, surprising everyone.

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The bullish breakout was a surprise because the yen acted so far as a safe haven currency. Therefore, the war should have triggered a strong demand for the yen, but the opposite happened.

116 was a key level. Once above, nothing stopped the USD/JPY bulls – not even the Bank of Japan’s intervention.

Bank of Japan intervenes in the FX market

Japan is the second country with the most foreign exchange reserves. Only China surpasses it.

This year, for the first time in a quarter of a century, the Bank of Japan intervened in the FX market to stop the yen’s depreciation. It did so by selling US dollars to buy yen in a desperate effort to curb the USD/JPY rise.

It succeeded, for now.

But it needed to intervene twice – once at 146 and once above 150. So can the USD/JPY still push higher?

And why is the Bank of Japan not worried about inflation?

Inflation in Japan accelerated to a 40-year high

In October, the Consumer Price Index reached a 40-year high in Japan. The CPI in Japan excludes volatile fresh food prices, but it does include energy.

It rose by 3.6% YoY in October – the fastest gain since February 1982.

Yet, the Bank of Japan does not change its monetary policy stance. On the contrary, it keeps the easy stance and ignores the global trend of central banks hiking rates in their fight against inflation.

140 is a major support area

Judging by what the charts say, the Bank of Japan’s intervention was successful. The USD/JPY exchange rate dropped from above 150 to below 140, closing at 140.45 yesterday.

But the bullish trend is hard to ignore. When markets advance or decline, they rarely do so in a straight line.

Therefore, pullbacks are normal.

The bullish trend seems to be over for now, given that the market advanced in a five-wave structure. According to the Elliott Waves theory, markets advance in five-wave structures during impulsive waves.

Such a wave ended with an attempt above 150, just as mentioned here ten days ago. But on a larger degree, the current drop is just part of the 4th wave, meaning another attempt to 150 is in the cards.

Can it come in 2022? Unlikely.

But one should not be surprised to see the USD/JPY pushing to new highs somewhere in the second or third quarter of next year.

All in all, the bullish trend seems to be over for now, but buyers should emerge on any dip below 140. Another attempt at 150 would complete the 5th wave of a larger-degree impulsive structure.