USD/JPY forecast: inverse cup and handle points to a yen surge

The USD/JPY exchange rate rose for the third straight day after the latest Bank of Japan (BoJ) interest rate decision. It jumped to an intraday high of 143.67, up from the year-to-date low of 139.95. This article examines what to expect and why the broader downtrend is likely to persist as it forms an inverse cup and handle pattern.

BoJ interest rate decision

The USD/JPY pair tilted upward after the BoJ left interest rates unchanged at 0.50% as it observed the impact of Donald Trump’s tariffs on the Japanese economy. This decision was in line with what most analysts were expecting. 

The swap market expects that the BoJ will only hike interest rates later this year. Before the current crisis, market participants were expecting the bank to hike in the next few meetings since inflation remains high in the country. 

Japan is one of the countries most affected by Trump’s tariffs. He has implemented a 25% tariff on automobiles and their parts, which analysts see as an embargo on the country. 

A 25% tariff on Japanese vehicles, such as those made by Toyota, Nissan, and Honda, will make them unaffordable in the United States. It will also make them more expensive than those made in the US. 

Therefore, there is a likelihood that the Japanese economy will remain under pressure because of the vast amount of vehicles that it ships to the US. At the same time, these firms are dealing with high competition from EV companies like Zeekr and BYD in China and the Southeast Asian region.

Recent economic data indicate that the Japanese economy is not performing as well as expected. A report released on Wednesday showed that preliminary industrial production data decreased by 1.1% in March, following a 2.3% increase in the previous month. 

US nonfarm payrolls data ahead

The USD/JPY exchange rate rose because of the recent economic data from the United States that revealed that the economy was slowing.

US consumer confidence dropped sharply in April, leading Mark Zandi, the top economist at Moody’s to warn that the country was on the precipice of a recession.

Another data by the Bureau of Economic Analysis (BEA) showed that the US economy contracted by 0.3% in the first quarter.

US trade deficit surged in Q1 as companies rushed to buy goods ahead of tariffs. Indeed, the deficit with Japan jumped to over $63 billion.

The labor market is also softening as the private sector added just 61k jobs last month. Therefore, all eyes are on the upcoming official nonfarm payrolls data scheduled on Friday.

Economists expect the data to reveal that the economy added 120,000 jobs in April, with the unemployment rate remaining at 4.2%.

USD/JPY technical analysis

The daily chart shows that the USD/JPY exchange rate has been in a strong downtrend in the past few months.

While the pair has risen, there is a likelihood that it will resume the downtrend because it has formed an inverse cup and handle pattern. The ongoing recovery is part of the handle section of this pattern. 

Therefore, the pair will likely remain steady in the near term, and then it will have a bearish breakdown in the coming days. More downside will be confirmed when the pair drops below the lower side of the cup at 139.95.

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