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USDJPY could extend to 135.00 on continued hawkish Fed sentiment

The trend is your friend until the bend in the end, but that bend, in the end, will not necessarily emerge without some shift in the fundamentals. Sentiment in the retail space is heavily biased to the downside which is adding fuel to the fire that sent the UJ exponentially higher in March. If we were to get an AB=CD move which originated in 2012, you can forget 135.00 and just head for 150.00. But that would be based on the status quo remaining for longer.


Forex Analysis – USDJPY

USDJPY is predicted to remain well supported around its multi-year highs and possibly extend its upward movement in the near term, as yield differentials between the US and Japan widen with monetary policy divergence. The yen will also suffer from negative terms of trade, shocks from higher commodity prices, especially energy prices, and direct and portfolio capital outflows according to several analysts.


It is tempting to keep looking higher in the USDJPY, but we should consider what would occur with the potential shift in Japan's policy stance towards normalization and an anticipated unwinding of broad USD strength. Under this scenario, global macro trends in the yen could shift. Therefore, the larger outside risk in H2 22 is tilted towards USDJPY becoming less of a bullish asymmetric trade and with some increasing headwinds set to reverse USDJPY gains following this latest exponential move in March.


The normalization in BoJ monetary policy could be spurred by fading Omicron concerns, as its forward guidance is highly dependent on COVID and the response to emergency measures. Though China is currently keeping the world on alert as we're seeing COVID rip through manufacturing and central business districts.


Meanwhile, continued upward revisions in inflation and a corresponding acceleration in Fed hike prospects could wipe out all the other concerns and send the USDJPY to its highest level since 2002.

Nevertheless, continued upward revisions in inflation and a corresponding acceleration in Fed hike prospects could wipe out all the other concerns and send the USDJPY to its highest level since 2002.

The ActivTrades sentiment indicator is showing that the short trade is very crowded with 94% of traders on the platform trading the USDJPY trying to pick the top. This cohort will need to be stopped before we see a meaningful move lower in the pair. If they don’t flip to being more neutral, the acceleration through their stops will just keep occurring.

We see on the daily chart that any pullback is bought into, and it is these daily red candles that sucker in the traders looking to go against this technical and fundamental trend. For me, until the price action is below the 200-period moving average, I wouldn’t think of taking a short whilst the monetary policies remain as they are now.

I would rather wait for an old daily high to get tested and for that level to show it has buyers stepping back in to defend the level. In the intraday chart currently, it does look like a small range has had the highs and lows swept. So, a break in either direction would be a continuation pattern. The problem with shorting is that you go straight into a known level of previous resistance which is likely to act as support. Whereas if you buy a break to the upside it's basically clear skies until the highs of 2002.


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