Japanese Yen Outlook: USD/JPY Breakout Potential, Inflation in Focus

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USD/JPY ANALYSIS

  • Yen continues to hurt after poor GDP print.
  • U.S./China tensions subside after Presidential meeting.
  • BOJ commitment to growth and inflation target may hurt JPY.
  • Potential breakout pending on bull flag pattern.
  • Mixed IG Client Sentiment (IGCS).
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JAPANESE YENFUNDAMENTAL BACKDROP

The Japanese Yen has been depreciating against the U.S. dollar this week beginning with a poor growth data – see calendar below. In addition, the safe haven appeal of the Yen was withdrawn for the time being after President Biden and Chinese Leader Xi Jinping somewhat decreased any tension between the two nations.

Later this week markets are looking forward to Japanese inflation data which remains well below the Bank of Japan (BOJ’s) 2% target rate; which remains close to 0%. The BOJ has reiterated this pledge along with maintaining the accommodative environment to support economic growth which should lead to further Yen weakness.

JPY ECONOMIC CALENDAR

Japan GDPJapan CPI

Source: DailyFX economic calendar

The graphic below illustrates the currency weakness of the Japanese Yen year-to-date, being the weakest of the major currencies against the greenback. U.S. 10-year Treasury yields (USD/JPY is the highest positively correlated G10 pair to 10-year U.S. Treasury yields) are rising as inflationary pressure increases which could lead to a sooner than expected taper completion as well as rate hikes being brought forward.

USD/JPY 2021

Source: Reuters

USD/JPY TECHNICAL ANALYSIS

USD/JPY Daily Chart:

USDJPY daily chart

Chart prepared by Warren Venketas, IG

The daily USD/JPY chart above has been consolidating since mid-October, forming a bull flag chart pattern (blue). Fundamentally, the USD look primed to continue its pre-flag rally which could see a breakout above flag resistance. The Relative Strength Index (RSI) remains above the 50 level, supportive of upside momentum.

Key resistance levels:

Key support levels:

  • 114.00
  • 112.42 – 50% Fibonacci level

IG CLIENT SENTIMENT POINTS TO SHORT-TERM UNCERTAINTY

IGCS shows retail traders are currently net short on USD/JPY, with 69% of traders currently holding short positions (as of this writing). At DailyFX we take a contrarian view on sentiment which suggests further upside on the pair however, the net change (daily) in long positions outweigh shorts which result in a mixed disposition.

Contact and follow Warren on Twitter: @WVenketas

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