Buy USDJPY Dips as pair is on a Bullish Run Amid Policy Divergence and Geopolitical Tensions
Thursday, April 18, 2024 - Week 16
Five-Week Outlook: USDJPY Set to Strengthen as Fed Maintains Hawkish Stance
The USDJPY currency pair is likely to continue with its bullish trend over the next five weeks as it potentially targets the 156 level. This outlook is primarily driven by the widening divergence in monetary policy between the U.S. Federal Reserve (Fed) and the Bank of Japan (BOJ). The Fed's hawkish stance, supported by resilient U.S. economic data, suggests that interest rates will remain higher for longer. In contrast, the BOJ is expected to maintain its ultra-loose monetary policy, with board member Asahi Noguchi indicating that the pace of future policy adjustment will be slow. This policy divergence is likely to support the U.S. dollar against the Japanese yen.
Furthermore, escalating geopolitical tensions in the Middle East, particularly the Israel-Hamas conflict, may boost safe-haven demand for the U.S. dollar. The potential for the conflict to spread and disrupt global trade could lead to increased volatility in currency markets, favouring the greenback over the yen.
Five-Day Forecast: Bullish Pressure Dominates as Fed Officials Reinforce Hawkish Messaging
Over the next five days (from April 18 to April 23, 2024), the USDJPY pair is expected to face bullish pressure, driven by fundamental factors and economic events. Hawkish remarks from Fed officials, including Chair Jerome Powell and Cleveland Fed President Loretta Mester, have dampened expectations for rate cuts this year. This messaging, combined with stronger-than-expected U.S. economic data, such as retail sales, inflation, and labour market figures, supports the case for a prolonged period of higher interest rates. As a result, markets have significantly scaled back their expectations for Fed rate cuts, further strengthening the U.S. dollar against the yen.
On the Japanese front, the BOJ's commitment to maintaining accommodative monetary settings, despite ending its negative rate policy earlier this month, is likely to keep the yen under pressure. The BOJ's dovish stance widens the policy divergence with the Fed, favouring the U.S. dollar in the near term.
Recent Economic Indicators and Volatility Drivers
Several economic indicators have contributed to volatility in the USDJPY pair and influenced the economic outlooks documented in the fundamental analysis reports:
U.S. Consumer Price Index (CPI) and Core Inflation: The U.S. CPI rose to 312.33 in March 2024, with the inflation rate accelerating to 3.5%, a 7-month high. Core inflation remained stubbornly high at 3.8%, exceeding market expectations. These figures support the Fed's cautious approach to lowering interest rates.
U.S. Retail Sales: Retail sales in the U.S. grew by 1% in March 2024, indicating a resilient consumer sector and providing further justification for the Fed's hawkish stance.
U.S. Producer Price Inflation: Although producer inflation slowed to 0.2% month-over-month in March 2024, it still indicates persistent inflationary pressures, which may keep the Fed on a tightening path.
Japan's Producer Prices Change: Japan's producer inflation accelerated to 0.8% in March 2024, highlighting the challenges faced by the BOJ in achieving its inflation target and maintaining accommodative policies.
Updates to Risks in Fundamental Analysis Reports
The escalating conflict between Israel and Hamas in Gaza, as well as the potential for it to spread northward into Lebanon, poses a significant risk to regional stability and global trade. This development amplifies the geopolitical risks outlined in the fundamental analysis reports and may lead to increased safe-haven demand for the U.S. dollar.
Additionally, the intensifying U.S. presidential campaign and its potential impact on foreign policy, particularly regarding aid to Ukraine and trade relations with Mexico, introduce new risks that could affect currency markets. The lack of bipartisan cooperation on critical issues may lead to increased trade disruptions and undermine global economic stability, further supporting the U.S. dollar as a safe-haven asset.
In conclusion, the USDJPY currency pair is expected to experience a bullish trend over the next five weeks, driven by the widening monetary policy divergence between the Fed and the BOJ, as well as escalating geopolitical tensions. The pair is likely to face bullish pressure in the near term, supported by hawkish Fed messaging and strong U.S. economic data. Forex traders should closely monitor central bank communications, economic indicators, and geopolitical developments to navigate the expected volatility in the USDJPY pair.