HomeContributorsFundamental AnalysisUSD/JPY: It's the 118 Not 120 Level that Matters

USD/JPY: It’s the 118 Not 120 Level that Matters

USD/JPY broke above 120 for the first time since 2016 in early Tuesday trading. This latest leg higher comes as the US Federal Reserve doubles down on its commitment to do whatever it takes to combat inflation.

Meanwhile, the Bank of Japan remains steadfast in its commitment to keep interest rates low even as its peers contemplate tightening policy. In truth, this divergence between the two central banks has been playing out for sometime.

USD/JPY has risen by c. 4.71% against the US dollar year to date, making the Japanese yen the worst performing major currency. Even the war-torn EUR/USD, down by 3.2% since the start of last year, has faired better than the Japanese yen versus the US dollar.

Nevertheless, USD/JPY’s latest heights, if sustained, mark a big structural shift in the currency pair. Prior to breaking the above the 118.50 region, once could make a case that the pair was still stuck in a range between the June 2016 swing low of 98.987 and the December 2016 swing high of 118.667. The further price moves away from the latter level leaves less chance of a downside retest and higher probability the pair has entered a longer-term uptrend. To the upside, the 121.50 to 121.75 region looks like the next pivot point for price before reaching 123.00.

That said, traders who have been late to the party, or even those who have already profited should consider the speed of the latest upswing. The current impulsive move higher already dwarfs the last corrective move lower. Such disharmony in wave patterns could portend a sharp retracement or range-bound conditions ahead, or both. Furthermore, there are also fundamental grounds to consider. First and foremost, in the near term there is only so much scope for the Fed to talk up rate hike expectations.

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