Fundamental analysis of USD/JPY

The USD/JPY duo, unafraid of an immediate decline to 141.450, is approaching its 2022 twilight zenith, skirting the 142.000 mark. This indicates a strong expansion of the bullish arc of the previous quarter.

The fulcrum of this cheerfulness lies in the dissonance of the monetary tactics used by the Bank of Japan (BoJ) vis-à-vis other international monetary institutions, especially the US Federal Reserve (Fed). This split, combined with a moderately strengthening U.S. dollar (USD), bodes well for the USD/JPY fraternity, although overextended states do limit bullish rates.

By keeping the cost of short-term borrowing at minus 0.1%, the Bank of Japan has also chosen stasis in its yield curve control strategy, highlighting the desire for economic rejuvenation amid global unpredictability. Conversely, the Fed, though supportive of interest rates, hinted at an anticipated 50 basis point increase by year-end, indirectly supporting both the US dollar and the dollar/yen pair.

Nevertheless, sluggish U.S. macro indicators are increasing uncertainty about additional rate hikes, fueling speculation about the potential end of the Fed's tightening era. This, combined with fears of a global economic slowdown and a subdued risk atmosphere, is extending an olive branch to the safe haven JPY. Market participants remain vigilant, hurt by reduced trading volumes and holding their breath in anticipation of the upcoming bicameral speech from Jerome Powell, Fed Chairman.

The focus of investor attention will be on Powell's prediction of an impending rate hike, thereby shaping the inevitable dollar valuation trends and the trajectory of the dollar/yen pair. The current fundamental backdrop hints that spot valuations may rise, and any rate cuts are likely to attract buyers and remain limited.

The monetary strategies recently adopted by the Fed and the Bank of Japan have caught the attention of market participants. The former has kept rates steady, predicting further increases, while the latter has maintained its ultra-soft policy. Reflecting this, the USD/JPY duo is showing support for the US dollar as a result of an optimistic US interest rate outlook, while the yen is experiencing depletion, falling to its lowest level against the dollar and euro in months.

The market climate creates an optimistic outlook for short-term U.S. interest rates, attributing a 74 percent chance of a 25 basis point hike next month. However, two more hikes are expected to be confirmed this year. Powell's testimony and the Bank of Japan's commitment to ultra-soft monetary policy will have an ongoing impact on USD/JPY dynamics.

Currently, the pair is in a consolidation phase after a rapid escalation, which is supported by a bullish interest rate scenario in the United States and the pressure of the ultra-soft policy of the Bank of Japan.

Technical analysis and scenarios:

Based on fundamental and technical analysis, the USD/JPY pair is expected to maintain its bullish trajectory in the coming days, mainly due to monetary policy divergence between the Fed and the Bank of Japan as well as a hawkish interest rate outlook in the US. If the pair continues to follow a bullish trend, traders may consider a buy position. Given the current bullish sentiment and the Alligator indicator showing an uptrend, this scenario seems likely. However, as AO and AC are in the gray zone, showing divergence, caution should be exercised.

Recommended entry level (BUY): 142.300.

Take Profit: 142.500 and 143.000.

Stop loss: 142.000.

Recommended entry level (SELL): 140.750.

Take Profit: 139.700 and 138.700.

Stop Loss: 141.300.