USD/JPY forecast: Here’s why the Japanese yen is soaring today

The Japanese yen rebounded for the second consecutive day as investors reacted to the ongoing divergence between the Federal Reserve and the Bank of Japan (BoJ). The USD/JPY exchange rate retreated to a low of 156.30, down sharply from the year-to-date high of 157.83. It has also formed a risky chart pattern pointing to more downside in the near term.

USD/JPY technical analysis points to a retreat 

The daily timeframe chart shows that the USD/JPY exchange rate has pulled back in the past two consecutive days. This retreat happened after the pair formed a double-top pattern at 157.83 with a neckline at 154.37.

A double-top pattern is one of the most common bearish reversal chart patterns in technical analysis. 

A closer look shows that the pair has formed a bearish divergence pattern as the MACDA and the Relative Strength Index (RSI) continued to move downwards. A bearish divergence happens when these oscillators drop when a currency pair is in an uptrend.

Therefore, a combination of a double-top pattern and a bearish divergence means that the USD/JPY pair will continue falling, with the next key target being at 154.45, the neckline of this pattern. A move below that price will point to more downside, potentially to the psychological level at 150.

BoJ and Fes divergence 

The Japanese yen rose for the second consecutive day after Japan’s Finance Minister, Satsuki Katayama, said that the government was prepared to take bold actions if it moves out of line with its fundamentals.

His statement came a few days after the Bank of Japan (BoJ) delivered its interest rate decision, which was in line with expectations.

The bank hiked interest rates by 0.25% and delivered a muted forward guidance, with analysts expecting the bank to deliver one or two hikes next year. It is doing that since inflation has remained at an elevated level in the past few months. A report released on Friday showed that inflation rose to 3.0%.

The BoJ has taken other hawkish policies that have pushed bond yields to the highest level in years. For example, it is considering selling ETFs worth over $500 billion and had already ended its quantitative tightening policy.

The Federal Reserve has taken the opposite approach as it embraced a dovish tone. It slashed interest rates for the third consecutive meeting this month and some Fed officials are hinting of more cuts in the coming meetings. 

In a statement on Monday, Governor Stephen Miran warned that the Federal Reserve risked a recession without cutting interest rates. He said:

The most recent data showed that the unemployment rate rose to 4.6% in November, reflecting the number of government employees who took Donald Trump's early retirement offers. Another report showed that US inflation cooled in November.

However, James Williams, the head of the New York Federal Reserve, warned that there was no urgency to cut interest rates again, recommending a continued pause.

Looking ahead, the US will publish some important data later on Tuesday. The key numbers to watch that may move the USD/JPY exchange rate will be the upcoming US consumer confidence report, GDP, industrial, and manufacturing numbers.