USDJPY Goes Parabolic – Could We See 1.10 Next Week?

Just yesterday, we asked whether a “Fed-Fueled Fire” could drive USDJPY to a new 6-year high above 107.40 (see below for more). As it turns out, the Fed dumped a proverbial gallon of lighter fluid on the fire, and the ensuing bullish inferno has propelled USDJPY more than 150 pips higher. With the rally going full-on parabolic as we go to press, traders are wondering how far USDJPY could rise before taking a breather.

From a fundamental perspective, the rally appears to be strong footing. Although the Fed left in its “considerable time” (until an interest rate hike) pledge, the so-called “dot chart” suggested that Fed members expect to hike rates very aggressively when they do start to normalize. The members’ median expectation for the funds rate is now 1.375% at the end of 2015 and 2.2875% at the end of 2016; this suggests that the central bank members anticipate five 25bp rate hikes next year and another four or so in 2016. USDJPY may extend its gains in the short-term as traders continue to adjust to the Fed’s aggressive rate hike expectations.

On the technical side, yesterday’s rally led to a conclusive break above the USDJPY’s bullish flag pattern. From here, the “measured move” target projection at 1.0950 may beckon to bullish traders. Beyond that level, key psychological resistance at 1.1000 or previous resistance near 1.1060 could present extended targets. While parabolic rallies can run further and faster than many traders expect, they are notoriously vulnerable to violent corrections, so traders in either direction may want to use tight stops to help protect themselves from the elevated volatility and uncertainty.