USD/JPY Weekly Forecast: Federal Reserve and the Bank of Japan head for different exits

A combination of factors drove the USD/JPY to a four-year high on Friday. 

Russian President Vladimir Putin’s comment that there were “certain positive developments” in talks with Ukraine undermined the yen safety trade. The close on Thursday at 116.12 was just below the four-year high of 116.35 from January 4. Next week, the Federal Reserve and Bank of Japan (BoJ) will diverge in practice as well as theory as the US central bank will raise its base rate and Japan’s will remain negative. 

In combination, the elements ensured that the buying pressure that began from stop loss orders above 116.35 did not expire as the short squeeze waned above 116.50, but provided long-term logic to take the USD/JPY higher.  

The Fed has all but promised a 0.25% hike on March 16. Treasury futures have the odds at 95.9%. Markets are undecided whether the governors will initiate a reduction of the bank’s $9 trillion balance sheet. With the Consumer Price Index (CPI) at 7.9% in February and sure to go higher in the coming months, a roll-off of maturing bonds would send a powerful signal to the credit markets that the Fed is serious about countering inflation. Treasury yields moved sharply higher this week, with the 10-year return just below its pandemic high and the 2-year several points over. 

In contrast, the  Bank of Japan is expected to maintain its -0.1% main rate at its meeting on Friday. Japanese National CPI was 0.5% annually in January and that is expected to fall to 0.3% when the February figures are issued on March 17. The Core rate was -1.1% in January and is forecast to be -0.9% in February.  

Even though Japan imports nearly all of its energy and prices have soared in the past year, deflation has proved a nearly intractable problem and there is no consideration at the BoJ for higher interest rates. 

Japanese Labor Cash Earnings were better than expected at 0.9% in January, giving a modest boost to consumers. Overall Household Spending for January at 6.9% nearly doubled 3.6% forecast. The Eco Watchers Survey for  February that tracks regional economic trends was weaker than predicted in both the current and outlook measures. Economic activity was also slower-than-anticipated in the fourth quarter as GDP came in at 4.6% annualized, below the 5.6% forecast and the third quarter’s 5.4%. 

In the US, February CPI at 7.9% cemented Fed policy intentions and the certain prospect of higher inflation may be sufficient to force a reduction in the balance sheet. 

The Michigan Consumer Sentiment Index dropped to 59.7 in March, well below its 61.4  estimate and February’s 62.8 reading. It was the lowest result in over a decade and underscores the economic risk as soaring inflation forces consumers to cut back on optional spending to meet bills and necessities.

USD/JPY outlook

The concatenation of technical and fundamental events favor a higher USD/JPY. 

Interest rate policies from the Fed and BoJ are not just opposite in the near-term, but for the foreseeable horizon. That difference will remain regardless if and when the Ukraine war ends. Resistance above 117.00 is weak and depends on levels from four years and more in the past. From November 2014 to February 2016 the USD/JPY ranged from 117.00 to over 125.00, as it did and higher for most of the decade from 1997 to 2007.  

If the Ukraine war worsens and a shortage of energy supplies and higher prices puts the global economy in recession, the USD/JPY would prosper from the safety-trade, though less than the US dollar would gain against European competitors.

Japan's nationwide CPI figures for February will give no pleasure to the BoJ or change the bank's failed accommodative monetary policies. February's Export and Imports figures will likely show a decline in both categories.  

In the US, February Retail Sales on the morning of the Fed decision, will be carefully considered. Markets and the Fed will be particularly sensitive to any sign that inflation is starting to curb consumption. At 70% of GDP, consumer spending is the most crucial aspect of the economic recovery and, by default, of Fed policy.  

There are no current scenarios that lend to a stronger Japanese yen. 

Japan statistics March 7–March 11

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US statistics March 7–March 11

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Japan statistics March 14–March 18

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US statistics March 14–March 18

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USD/JPY technical outlook

Technical indicators are strongly positive. The break of the four-year top at 116.35 and the follow-through to above 117.00 are clear pointers to an immediately higher range.

The MACD (Moving Average Convergence Divergence) priceline crossed the signal line on Wednesday and has opened the largest divergence since January. The Relative Strength Index (RSI) is verging on overbought status and took a much steeper angle as the USD/JPY neared 116.00 and then 117.00. Volatility in the Average True Range (ATR) did tick up on Thursday and Friday but is relatively subdued considering the traversed levels this week. 

Compare the support and resistance structure in the USD/JPY and the upside weakness is immediately apparent. Support is recent and well-tested. Resistance refers to a brief sojourn above 117.00 in the last two weeks of 2016 and the first week of 2017. From March 2017 to December 2021 the USD/JPY did not trade above 115.00.  Moving averages (MA) are all below, joining support at 115.40 (21-day MA) and 114.55 (100-day MA).  

Resistance: 117.50, 118.20, 118.65

Support: 116.35, 115.65, 115.40 (21-day MA), 114.80, 114.55 (100-day MA 114.56)

FXStreet Forecast Poll

The FXStreet Forecast Poll highlights the resistance at 116.00 and 117.00 that was surmounted on Thursday and Friday.