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USD/JPY holds above 107.00 (video)

By Kira Iuchtenko, FBS analyst

The US dollar recorded several 6-year highs against the Japanese currency, pushed higher by an increasing gap in the economic trajectory in the US and Japan. These days the markets are ready to pay more than 107 yen per dollar amid expectations of a coming policy tightening in United States.

The market is strongly overbought. You should also note that the pair approached the trend resistance, connecting the May and December 2013 highs (currently around 107.50). Any disappointment in the hawkishness of the US Federal Reserve would pull the pair down at least to 106.00 yen. Next support lies at 105.40.

In the long term we remain strongly bullish for the pair, targeting 110.00/60 yen in the coming weeks. Markets are pricing in the end of QE in October. However, the Federal Reserve meeting scheduled on Sep. 17 is a high risk for the USD/JPY buyers. The recent data are posing some doubts: for example, August industrial production shows contraction. There is a chance that the Fed won’t sound as optimistic as the markets expect.

Meanwhile, the Japanese economic recovery stumbled. Last week the BOJ Governor Kuroda said that the central bank will not hesitate to ease policy further if a 2% inflation goal starts looking difficult to achieve.

This week there are not many releases of importance in Japan. It makes sense to watch the trade balance on Wednesday and to the BOJ Governor Kuroda speech on Thursday. 

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