Home ForexForecasts Pressure mounts on Japanese yen as US dollar shows continued strength

Pressure mounts on Japanese yen as US dollar shows continued strength

by SuperiorInvest

It has come back into fashion in the last two weeks, as the latest economic data has shown that the US economy remains buoyant.

After volatile moves in the 103 region last week as investors awaited the Federal Reserve's decision, the dollar continued to rise priced by those who maintained their expectations that the Fed will keep rates high for longer.

As a result, the DXY, which closed the week in the 104 region, is now also technically above a critical resistance.

Considering the 2024 swing, the 104.3 level remains a critical resistance as measured by Fibonacci after confirming that the short-term downtrend has been broken. After this level, the 104.9 level stands as the next second resistance level, while the current momentum is likely to continue up to 105.4, which corresponds to 0.618 Fib.

Although the strong US economy is seen as the main factor supporting the dollar, the Federal Reserve's clear statement that it will cut interest rates during the year will remain the main factor depressing the dollar.

The main question here is whether Powell will cut interest rates less than the third rate cut projection, depending on economic data throughout the year.

He recently said he expects the bank to cut rates just once this year, by a quarter of a percentage point. While this forecast is far from market expectations, if Bostic's view gains popularity or if data in the coming months remains strong, the dollar is likely to continue dominating other major currencies.

However, in the usual scenario, a rate cut by the Federal Reserve in the second quarter of the year could cause a fall in the dollar. This could cause the index, which could rise to the 105 region, to re-enter a downtrend. As a result, the dollar index can be expected to remain under pressure in the first half of this year, depending on the forecast for a short-term recovery and then a bearish momentum.

Dollar also under pressure on Far East intervention speculation

Even though Japan showed signs of abandoning expansionary monetary policy by giving up the negative interest rate after many years, it continued its rise, reaching a high of 151.

USD/JPY

The pair has reached the October 2022 price level again, when Japan intervened in the exchange rate.

The current level was also tested in November 2023 and a pullback was discussed at that time as speculation grew that Japanese authorities could intervene in the exchange rate. Although no intervention was seen at the time, the BOJ's rhetoric was effective.

Currently, the Japanese yen is at the weakest levels in recent years against the dollar. As the Japanese government continues to warn that the depreciation of the yen does not reflect the fundamentals of the economy, market speculation about possible intervention against the yen has increased again.

Although the Bank of Japan took interest rates out of negative territory last week, this move was not enough to support the yen. Investors expect interest rates in Japan to remain low for some time and the interest rate differential with the United States supports the yen's weakness.

Now, with USD/JPY at all-time highs, market participants are on high alert, fearing intervention at any moment. This makes the pair less likely to break the hard resistance area at 151.

On a possible breakout, the pair is likely to jump towards 154 – 158 levels, but even the rhetoric from the Japanese government is enough to keep the pair at this point. In the event of an intervention, USD/JPY could quickly fall towards the 140 region.

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Disclaimer: This article is written for informational purposes only; It does not constitute a solicitation, offer, advice or recommendation to invest as such and is not intended to encourage the purchase of assets in any way. I would like to remind you that any type of asset is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains in the hands of the investor.

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