USD/JPY Forecast: Fed-fest vs. BOJ jitters after the plunge

• The USD/JPY fell to the lowest levels since November 2016 on the weakness of the US Dollar.
• Correlations with bonds and stocks have become jittery.
• The BOJ may get nervous as the yen strengthens and the pair is already trading in oversold conditions. 

Dollar dive carries the pair away

Markets initially reacted as expected to the upbeat US inflation report. The US Dollar gained ground against all currencies except the safe-haven yen. As stocks turned positive and the mood improved, the greenback fell across the board and the yen continued strengthening. Correlations between the USD/JPY, bond yields, and stock markets broke down.

In Japan, Finance Minister Taro Aso initially refrained from intervening in currency markets and went further to say that the strength of the currency does not justify such a move. The tone changed later on as Japanese officials said they were watching currencies closely. 

Haruhiko Kuroda has been nominated to continue leading the Bank of Japan for a second term, ending speculation. Kuroda is at the helm since April 2013 and has presided over a massive bond-buying scheme, the QQE. 

A late US dollar recovery was also seen against the Japanese Yen, but the pair did not rise too much.

Fed focus

After a bank holiday on Monday and a light Tuesday, the highlight of the week comes on Wednesday with the FOMC Meeting Minutes. Janet Yellen presided over a slightly more hawkish tone in her last rate decision. The minutes from the late January gathering may reveal more on the current stance of the Federal Reserve about inflation, growth (given the fiscal stimulus), and monetary policy.

Fed officials may also respond to the latest inflation figures in a series of speeches on Thursday and Friday. Kashkari, Quarles, Dudley, Bostic, Mester, and Dudley again will have the chance to move the market.

Second-tier figures such as New Home Sales, Markit's Flash PMIs, and Jobless Claims will likely play second-fiddle to Fed officials and stock markets.

Here are the top US events as they appear on the forex calendar: 

Japanese inflation, trade balance, and maybe an intervention

The upcoming week features Japanese trade balance numbers early in the week, foreign investments later on and the most important event is the inflation report late on Thursday. National Core Inflation is expected to slow fo 0.8% YoY in January after 0.8% beforehand. 

The bigger speculation may be about a potential intervention, with a verbal one more probable, if the yen strengthens further. 

Here are the events lined up in Japan: 

USD/JPY Technical Analysis: Oversold

The graph shows a sharp downtrend and the RSI confirm that the pair is an oversold territory. Positioning has become extreme. The downfall may continue as the 50-day SMA crossed below the 200-day SMA recently, but a correction may come beforehand. 

The September 2017 low of ¥107.10 is the first notable resistance level. It is followed by ¥108.30 which supported the pair in late January.  ¥109.10 is the 61.8% Fibonacci retracement level of the fall from the highs of ¥114.50 to the lows of ¥105.55.  Next up is the 50% retracement level at ¥110.20 and the swing high of ¥110.50 afterward.

Looking down, the fresh 15-month low of ¥105.55 is the immediate line of support. It is followed by the round number of ¥105.

What's next for USD/JPY?

The pair may try to stabilize after the big fall and perhaps we may also see a correction. The pair may receive support from the BOJ and perhaps from the Fed. 

Examining the FXStreet FX Poll, we see a tentatively bearish sentiment, slightly different than a stabilization and a potential correction suggested here.