Diverging monetary policies favor USDJPY buyers

15 Feb 2022
EURUSD Daily Chart

 

After hitting a low of 102.591 in early January 2021, the USDJPY pair has since been on an uptrend recently and is currently hovering above 115. In this article, we will take a look at the fundamental drivers that had moved the pair in recent times and perform a technical analysis on the USDJPY weekly chart to identify possible entry and exit levels.

Record inflation in 4 decades

One of the recent development that drove the greenback higher against the Japanese yen was the inflation data, which shook the markets, indicating the highest inflation in four decades. The CPI measures the price movements by comparing retail prices of a basket of goods and services, and it is a key indicator to measure inflation.  Consumer Price Index (CPI) released by the US Bureau of Labor Statistics, was up 7.5% in January compared to a year ago. While beating the previous month’s figure, the red hot inflation came in higher than market consensus of 7.3%.

Hawkish Fed

The increasing cost of living in the US erodes the purchasing power of the US dollar and the expectation that the Federal Reserve will step up with more aggressive monetary policy tightening has boosted the US dollar against other major currencies.

Prior to the release of January CPI data last Thursday, the US dollar consolidated in a narrow range as markets anticipated the report. Since the Fed retired the word ‘transitory’ and turned hawkish late November last year, markets having been pricing in numerous rate hikes in 2022. After the release of the CPI data last Thursday, several Fed officials have turned even more hawkish, with Fed official James Bullard calling for a full percentage rate hike by July meeting. In addition to that, Wall Street also speculates 7 rate hikes in 2022. An interest rate hike is typically bullish for a currency as it will attract higher demand amid the increased yield of holding it as compared to another currency that offers lower yield.

Dovish Bank of Japan

Unlike the United States and European Union that are facing soaring inflation, Japan’s inflation remains largely sluggish with the December core CPI rising by only 0.5% year over year. Despite consumer prices rising at the fastest pace in nearly two years, the figure still resides below the Bank of Japan’s (BOJ) inflation target of 2%. Last week, the BOJ’s Governor Haruhiko Kuroda reemphasized his dovish stance by saying that the central bank will not debate on exiting its ultra-loose monetary policy during the rest of his term through April 2023.

The diverging monetary policy between the Fed and the BOJ will widen the yield spread and favour the buyers of USDJPY.

Technical Analysis

Technical set up on the USDJPY weekly chart is bullish with a completion and successful retest of an inverse head and shoulders formation. The completion of the chart pattern sets a technical target around 120. Technical indicators like the RSI and MACD paint the same bullish picture.

Looking ahead, we do anticipate USDJPY to break above R1 at 115.576, and reaching subsequent price targets at R2 and R3. In terms of downside possibility, the pair would be buoyed by the dynamic support line that connects the head and right shoulder of the inverse head and shoulders pattern.

Tuesday, February 15

USD – Producer Price Index ex Food & Energy (YoY)(Jan)

Wednesday, February 16

USD – Retail Sales (MoM)(Jan), Retail Sales Control Group (Jan), Retail Sales ex Autos (MoM)(Jan)

Thursday, February 17

USD – FOMC Minutes, Building Permits (MoM)(Jan), Housing Starts (MoM)(Jan), Initial Jobless Claims (Feb 11), Philadelphia Fed Manufacturing Survey (Feb)

JPY – Exports (YoY)(Jan), Imports (YoY)(Jan), Merchandise Trade Balance Total (Jan)

Friday, February 18

JPY – National Consumer Price Index (YoY)(Jan), National CPI ex Food, Energy (YoY)(Jan), National CPI ex-Fresh Food (YoY)(Jan)


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