The US dollar recovered from the 109.50 level against the Japanese yen currency last week, following a wild week for USDJPY traders as the pair finally found support buying interest after tumbling from the 111.00 area.
Global stock markets have started to stabilize, however, Yen traders should be prepared for another big week as the Bank of Japan meet to decide on interest rates and the United States economy release the latest CPI inflation report.
A big theme that I have been waiting to play out for some time is a deviation between the Federal Reserve and Bank of Japan in terms of monetary policy. I expect the FED will announce it will taper sooner than expected, while the Bank of Japan may need to even increase its QE purchases.
Westpac has recently released a forecast for the USDJPY pair of 115.00, which is slightly below my own forecast of 116.50. Westpac have also had a similar view to me in terms of diverging fiscal policy.
Westpac note “The Bank of Japan is likely to deviate most from the FOMC. There is not and will not be a reason for the Bank of Japan to pull back on policy accommodation let alone tighten policy for the foreseeable future”.
This week I expect the Bank of Japa to keep its key short-term interest rate unchanged at -0.1% and maintain the target for the 10-year yield. I also expect the central bank to acknowledge that the domestic economy is in poor shape. This could be the trigger for more yen weakness.
According to the ActivTrader Market Sentiment tool some 55% of traders are bearish towards the USDJPY pair, which is a negative sentiment increase of 9 percent. This is bullish for more USDJPY gains.
USDJPY Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that USDJPY pair has reached the downside target of a bearish head and shoulders pattern, so a rebound should be expected.
Encouragingly, bullish MACD price divergence has formed on the one-hour time frame, with the MACD histogram flatlining while the price fell last week. The bullish divergence extends up towards the 111.30 area.
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USDJPY Medium-Term Technical Analysis
The daily time frame is showing that the USDJPY pair is technically bullish above its 200-day moving average and continues to enjoy strong dip-buying demand on pullbacks.
The technical picture still looks good, and the pair has invalidated a large head and shoulders pattern last month with the pattern holding 250 points of upside potential.
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