USD/JPY forecast: technical signals point to more yen weakness

The USD/JPY exchange rate continued rising as the US dollar index (DXY) and bond yields rose to the highest point in months. The pair rallied to a high of 150, its highest level since August 1, and 7.5% above its lowest point this year.

Japan inflation and BoJ outlook

The USD to JPY pair continued its uptrend after Japan published encouraging inflation data on Friday.

According to the statistics agency, the headline Consumer Price Index (CPI) declined by 0.3% in September after growing by 0.5% in the previous month. This decline translated to a year-on-year increase of 2.5%, lower than the previous 3.0%. 

The core Consumer Price Index came in at 2.4% in September, higher than the median estimate of 2.3%. It was also an improvement from the previous increase of 2.8%.

These numbers mean that Japan’s inflation is moving in the right direction and that it will likely hit the BoJ target of 2.0% in the coming months.

Analysts expect that the Bank of Japan (BoJ) will embrace a wait-and-see approach before committing to interest rate hikes in the coming meetings. 

The BoJ, unlike other central banks, has embraced a relatively hawkish tone in the past few months. It initially hiked interest rates by 0.10% earlier this year and then another 0.25% in July.

The 0.25% hike led to major global volatility as investors started to unwind the Japanese yen carry trade. A carry trade is a situation where investors borrow a lower-yielding currency and invests in another higher-yielding one.

For a long time, investors borrowed the negatively-yielding Japanese yen and invested in other assets in the United States, Australia, and other countries.

Therefore, with Japan’s economy weakening and with inflation moving in the right direction, the BoJ will likely maintain rates at the current rate for a while. 

This explains why Japan’s government bond yields have continued rising. The 10-year yield rose to 0.97% on Friday, its highest point on August 7, and a 32% increase from the lowest point in September. 

Federal Reserve actions

The USD/JPY exchange rate has also staged a strong comeback because of the actions of the Federal Reserve. 

In its last meeting, the bank decided to cut interest rates by 0.50%, the biggest rate in over four years. 

Since then, the US has published strong economic numbers. Data released earlier this month showed that the unemployment rate retreated to 4.1% in September, the lowest level in two months.

The economy created over 254k jobs in September while wage growth continued expanding during the month.

Meanwhile, US inflation fell at a slower pace than expected. The headline Consumer Price Index (CPI) dropped from 2.5% in August to 2.4% in September. Core inflation, on the other hand, remained unchanged at 3.2%.

The latest US economic data showed that core retail sales rose by 0.5%, while the headline figure rose to 0.4%. Initial and continuing jobless claims numbers were better than expected last week.

Therefore, the Federal Reserve will likely act in two ways at the next meeting: cut interest rates by 0.25% or hold them steady.

This explains why the US dollar index (DXY) has soared to $103.87, its highest level since August 2nd. It has risen by over 3.52% from its lowest point this year. 

US government bond yields have also jumped. The ten-year rose to 4.088%, its highest point since July 31st. Similarly, the five-year yield rose to 3.9%. 

USD/JPY technical analysis

USD/JPY chart by TradingView

The daily chart shows that the USD to JPY exchange rate staged a strong comeback this week. It has risen to 150, its highest point since July 31st, and 7.15% from its lowest point in August. 

The pair has moved above the 38.2% Fibonacci Retracement point. It has also crossed the 50-day and 100-day Exponential Moving Averages (EMA).

Also, the Relative Strength Index (RSI) has moved above the neutral point at 50, while the MACD indicator has crossed the zero line.

Therefore, the USD/JPY pair will likely continue rising as bulls target the next point at 153.70, the 23.6% retracement point.

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