USD/JPY Price Forecast: Enters fresh upside leg on consolidation breakout

The Japanese Yen (JPY) outperforms its major currency peers on Thursday. Against the US Dollar (USD), the Asia-Pacific currency is marginally higher even as the US Dollar Index (DXY) hits a fresh 18-month high at 103.08 during the day.

As of writing, the USD/JPY pair edges down to near 159.65, but is close to its over two-month high of 159.94 posted on Wednesday.

The Japanese currency strengthens as hotter-than-projected Producer Price Index (PPI) data for October is expected to strengthen hopes of more interest rate hikes by the Bank of Japan (BoJ) in the near term.

Month-on-Month headline PPI grew by 0.7%, faster than 0.3% estimates. Inflation at the producer level was declined by 0.2% in September. On an annualized basis, the PPI unexpectedly grew at a faster pace of 7.1% against the prior release of 6.8%. The data was expected to have grown at a moderate pace of 6.5%.

Meanwhile, the US Dollar outperforms amid fears of an aggressive Federal Reserve (Fed) monetary tightening going forward.

Analysts at Rabobank highlight that the market’s response to the latest hawkish commentary from Fed officials, “including those from Waller that put the risk of a 50-bps rate hike on the table,” speaks to more than just a shift in rate expectations. They note that the market is now “fully priced for a December rate hike,” and, crucially, that these remarks were met “with no real speculation that the Fed would be pressured by political forces not to raise rates.”

Rabobank points out that “since Fed Chair Warsh surprised the market with a hawkish position at Jackson Hole in August, fears about diminished Fed credibility have dissipated.” In their view, “the results of last week’s mid-term elections suggest less reason to expect pressure from the White House,” reinforcing the perception that the central bank can proceed with policy tightening without significant political interference.

“In short,” Rabobank concludes, “markets have inferred that last week’s mid-term election result suggests that the issue of Fed credibility is likely to be diminished over the remainder of Trump’s term.” They argue that this development “should remove a significant potential hurdle from the outlook for the USD.”

USD/JPY Technical Analysis

In the daily chart, USD/JPY trades at 159.69, keeping a bullish near-term bias as spot holds above the 20-day exponential moving average (EMA) at 158.34. The pair is extending its advance from last week’s pullback and the EMA clustered below price suggests underlying demand remains firm. The Relative Strength Index (14) at 61.66 stays in positive territory but shy of overbought, hinting that upside momentum is constructive without yet appearing stretched.

On the downside, initial support is located at the 20-day EMA at 158.34, where buyers are likely to defend the recent breakout area on a corrective dip. As long as USD/JPY holds above this moving average, the technical tone would favor further gains, while a daily close below it would signal fading bullish control and open room for a deeper retracement.