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USD/JPY Risks Larger Correction on Less-Dovish BoJ, Risk Aversion

Fundamental Forecast for Japanese Yen: Neutral

USD/JPY may face a larger correction in the week ahead should the Bank of Japan (BoJ) remain confident in achieving the 2% inflation target and endorse a more neutral tone for monetary policy.

Falling energy prices may prompt the BoJ to curb its near-term forecast for inflation, but recent comments from Governor Haruhiko Kuroda suggests that the board will retain its current policy at the January 22 meeting as the central bank head continues to see a moderate recovery in the Japanese economy. After unexpectedly expanding its asset-purchase program at the October 31 meeting, the BoJ may preserve a wait-and-see approach for most of 2015 especially as Japan’s Cabinet approves the JPY 3.5T fiscal stimulus package to encourage a stronger recovery.

With that said, the fresh batch of developments coming out of the BoJ may fail to generate a more bullish outlook for USD/JPY, and the pair remains at risk of facing a larger pullback over the near-term as market participants scale back their appetite for risk. As a result, the dollar-yen correction may continue to take shape ahead of the next Federal Open Market Committee (FOMC) meeting on January 28, but the long-term outlook for USD/JPY remains bullish as Janet Yellen and Co. looks to normalize monetary policy later this year.

In turn, the December low (115.55) remains in focus for USD/JPY as the pair continues to carve a string lower highs & lows in January, and the technical outlook certainly highlights the risk for a further decline in the exchange rate as the Relative Strength Index (RSI) preserves the bearish momentum carried over from the previous month.