USD/JPY forecast: rising wedge points to a Japanese yen rebound

The USD/JPY exchange rate has soared in the past six consecutive days and is slowly nearing its all-time high as the Japanese yen sell-off intensifies. It was trading at 158 on Friday and was nearing its all-time high of 160.2. It has soared by more than 13% from its lowest point in January.

Japanese yen is plunging

The Japanese yen has become the worst-performing major currency this year as concerns about the Bank of Japan policy continues. 

In a statement last week, the bank announced that it would scale back its bond purchases significantly as it seeks to exit its ultra-loose monetary policies. 

However, the bank did not point to a potential interest rate hike now that inflation is still rising. A report published on Friday showed that Japan’s headline Consumer Price Index (CPI) rose from 2.5% in April to 2.8% in May. 

The core CPI, which excludes volatile food and energy products, also jumped from 2.2% to 2.5%. These numbers mean that Japan’s inflation is significantly higher than its historic standards. 

The BoJ is afraid of dramatically hiking interest rates because the economy is slowing while the government is in high debt. A report published on Friday showed that the manufacturing PMI dropped from 50.4 in May to 50.1 in June. Another data showed that Japan’s GDP contracted.

The services PMI, on the other hand, dropped from 53.8 in May to 49.8 in June. As such, hiking interest rates would help to slow the economy dramatically. 

At the same time, rate hikes would impact the government spending policies since it has a total debt of over $9 trillion. Japan is expected to pay over $169 billion annually in interest in the next decade. 

The performance of the Japanese yen is a reflection of the fact that currency interventions rarely work. As I wrote before, the government spent billions of dollars in rescuing the currency in the past few months.

Meanwhile, the USD/JPY pair is soaring because of the recent actions by the Federal Reserve, which pointed to higher rates for longer. 

USD/JPY technical analysis

USD/JPY chart by TradingView

The USD to JPY exchange rate has been in a strong bull run in the past few months. It soared to a high of 158.90 on Friday as bulls target the YTD high of 160.22. 

The pair has remanded above the 50-day and 25-day Exponential Moving Averages (EMA). Similarly, the Relative Strength Index (RSI) has moved above the neutral point while the two lines of the MACD have crossed each other. 

However, the pair has formed a rising wedge chart pattern, which is a popular bearish sign. Therefore, while the uptrend may continue, there is a likelihood that the pair will have a bearish breakout soon. If this happens, it will likely retest the key support at 157.

The post USD/JPY forecast: rising wedge points to a Japanese yen rebound appeared first on Invezz