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Japanese Yen Outlook: USD/JPY Uptrend Ready to Resume after Fed? PCE Next

Japanese Yen Outlook: USD/JPY Uptrend Ready to Resume after Fed? PCE Next

Daniel Dubrovsky, Strategist

Japanese Yen, USD/JPY, Fed, PCE – Analyst Pick

  • US Dollar recently turned higher against the Yen, will this continue?
  • A hawkish Fed may keep USD/JPY tilted to the upside going forward
  • Eyes on US PCE on Friday as USD/JPY clears falling trendline

USD/JPY Broader Uptrend Still in Focus After the Fed

The US Dollar may be readying to resume its uptrend against the Japanese Yen, which has its beginnings from early 2021. Both currencies can take on an ‘anti-risk’ role in markets, inversely tracking the S&P 500. For USD/JPY, the fundamental focus on monetary policy divergence can take on a more important role. This is compared to dollar crosses with sentiment-linked currencies, such as AUD/USD and NZD/USD.

This can be seen on the chart below, where I have overlaid USD/JPY with the 10-year US and Japan government bond yield spread. The Federal Reserve has become an increasingly hawkish central bank amongst its developed peers as of late. Prospects of higher interest rates in the United States, especially compared to yields in Japan, have been aiding USD/JPY upward for over a year.

However, for most of January, USD/JPY has been diverging with Treasury yields. This disconnect might have been explained by too hawkish Fed policy expectations after the latest US CPI report, showing inflation at a 40-year high. Now with the latest Fed interest rate decision behind us, USD/JPY seems to following rising Treasury yields again.

With a March hike and quantitative tightening just around the corner, incoming inflation and labor market data will be key to watch. The PCE core deflator, which is due on Friday, is expected to cross the wires at 4.8% y/y in December, up from 4.7%. With hawkish expectations so high, however, an in-line or softer outcome could calm the market. That may leave USD/JPY vulnerable in the near term, but the broader path may be tilted to the upside down the road.

USD/JPY Versus US-Japan 10-Year Government Bond Yield Spreads

Japanese Yen Outlook: USD/JPY Uptrend Ready to Resume after Fed? PCE Next

Chart Created in TradingView

USD/JPY Technical Analysis Daily Chart

USD/JPY has closed above a near-term falling trendline from the beginning of January. Upside confirmation may open the door to extending gains, placing the focus on the November high at 115.524. Above that sits the early January high at 116.353. On the downside, a close under 113.47 opens the door to extend losses towards the 112.533 – 112.838 support zone.

Japanese Yen Outlook: USD/JPY Uptrend Ready to Resume after Fed? PCE Next

Chart Created in TradingView

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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