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Forex Analysis – USDJPY
Based on past Fed tightening cycles, the trade-weighted value of the USD could rise by around 10% on average, with the bulk of the gains baked in before March 2022 and the remainder coming within the following year. In 7 weeks’ time, we could get a 50bp Fed hike thanks to continuing strong wages and inflation data. This is not the most likely base case, but still a probability being bandied around in fin-twit.
The US dollar index (DXY) is within striking of last year’s highs at 96.94. At which point it is only a short hop toward 99-100 and again it would be around now we’d expect the dollar to keep rising. It is clearly the strongest of the currencies we follow in this morning’s trading.
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The USDJPY is likely to break above 116.75 in the coming months, and resistance is located at the late 2016 and early 2017 highs of 118.66. The current consolidation scenario may extend further, but we see momentum is building and the consensus is growing for an upside breakout. The RSI indicator is showing a negative divergence with price, and traders will be watching to see if the price action reverses this trend. Otherwise, the breakout would be short-lived, and a deeper correction could be on the cards next.
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On a daily chart the USDJPY is trading back above the 20 & 50-period EMAs and the RSI is above the 50 levels. So indications are positive. Price action has now broken above the swing high from 18th January 2022 is also bullish. Though I am expecting a re-test of the 20 or 50 EMA before we go and tackle the 116 zone. Support to the downside was confirmed with a double bottom pattern, so there is bound to be sell stops resting there and therefore if we do get a reversal below 114 on a risk-off event, the 113 becomes more likely as traders would sweep the double bottom.
This bearish scenario is not my base case as the ActivTrader sentiment indicator is showing that 77% of traders on the platform are trying to short the pair. This should fuel the rise above 116 and maybe signal the top is in when they switch to neutral or bullish.
