The US dollar is breaking out at a rapid pace against the Japanese yen currency, with many foreign exchange experts blaming the policy difference between the FED and the BoJ as the primary reason why this is happening.
Additionally, the yen has been shunned as a safe haven currency and is going in the opposite direction to the Nikkei225, which is very strange, as both assets normally trade in lockstep. One is usually wrong, and that could hint that a spectacular reversal could take place at some stage in the USDJPY pair.
One of the other reasons why the JPY pair is surging is due to strong demand for the US dollar in times of war, and the strong greenback demand as emerging market debt rises.
Another potential reason why the USDJPY pair is surging is sentiment. A massive sentiment skew is currently underway, with a large majority of retail participants currently caught short the USDJPY pair.
According to the ActivTrader Market Sentiment tool shows that some 93% of traders are bearish towards the USDJPY pair. This is a near 5% weekly increase, and it should be noted that retail have been on the wrong side of this trade since the 115.00 level.
Considering that the pair is rising above the 118.00 level and the breakout in the buck, and the massive sentiment bias, I think we could probably see more upside ahead in the USDJPY pair towards the 119.00 area.
The central bank policy divergence between the Federal Reserve and the Bank of Japan is going to be key this week. Additionally, don’t downplay the risk of Japanese inflation rising, any sharply increase in inflation could cause the Yen to surge broadly.
USDJPY Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the USDJPY pair has formed massive amount of negative MACD price divergence in two key areas on the price chart.
The USDJPY pair currently has negative MACD price divergence extending down towards the 117.50 and also the 115.50 area. Traders need to be careful if this divergence starts to reverse.
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USDJPY Medium-Term Technical Analysis
The daily time frame is showing that the USDJPY pair has invalidated a huge head and shoulders pattern, and this has only served to accelerate the recent trip to the upside towards 119.00
We could see an important test of the 119.00 level coming soon, which is basically the overall upside target of the invalidated head and shoulders price pattern on the daily time frame.
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