USD/JPY: forecast for January 25-31
USD/JPY fell to the key support at 116.00 and recoiled upwards. This level limited the downside for the entire 2015 and so it constitutes a serious obstacle for the bears. The prospect of more easing by the European Central Bank in March increased expectations of additional monetary stimulus from the Bank of Japan (BOJ) on Friday, January 29.
The problems of Japanese regulator look similar to the ECB’s difficulties: low oil prices constraining inflation, expensive yen, decline in stocks. Nikkei 225 entered correction up only on Friday, while the dip since the start of the year is still about 10%.
The expectations of an increase in Japanese central bank's monetary stimulus are getting stronger and will likely support the pair at the upcoming week. Market participants are already sure that the regulator will at least cut inflation forecast for the next fiscal year. If the BOJ disappoints investors, the pair can break down to 113.60 (bottom of the weekly Ichimoku Cloud). At the same time, remember that the BOJ is not interested in USD/JPY falling below 116.00.
One more element of the puzzle is the meeting of the US Federal Reserve on Wednesday. The Fed started the rate hike cycle in December. Although this time US central bank should keep the policy unchanged, comments confirming that the Fed is still on the tightening track will help the greenback. The key resistance is at 118.70 – 50% of the dollar/yen’s decline in the first week of January – and then at 120.00.