USD/JPY Forecast: Pennant breakout confirmed

The USD/JPY's monthly chart shows a pennant breakout, meaning the rally from the September 2012 low of 77.13 has resumed.

The currency pair picked up a bid on Tuesday after the Bank of Japan (BOJ) lowered the price outlook and made its ultra-loose policy more sustainable for a long time.

The long-term yield target range has been widened to 0.2 percent from the previous 0.1 percent, i.e. the central bank is now willing to tolerate bigger deviation in the long-term yield. So, bond purchases might drop, courtesy of a wider range.

While some may call it a hawkish tweak, it was well short of an outright hike in long-term yield target that many in the market were expecting and had prepared for via long JPY put options.

Consequently, the JPY was offered after the BOJ decision. All-in-all, the BOJ has enabled itself to prolonged monetary easing, meaning the bond yield differential will likely continue widening in the USD-positive manner.

As a result, the USD/JPY could build on a long-term bull breakout seen in the monthly chart below.

Monthly chart

The pair closed well above 111.55 yesterday, confirming a pennant breakout – a bullish continuation pattern – which indicates the bull run from the September 2012 low of 77.13 has resumed.

So, as per textbook rules, the spot could target 118.66 (December 2016 high) in the near-term and is seen challenging 125.856 (June 2015 high) in the long-term.

The relative strength index (RSI) is hovering just above 50.00 (in the bullish territory), indicating plenty of scope for a rally to decade highs above 125.50. The RSI on the weekly and the daily chart also favors a stronger rally.  

Notably, the pennant breakout has opened the doors to completion of the inverse head-and-shoulders bullish reversal pattern. The neckline resistance is located at 126.40.