The USDJPY currency pair has sharply accelerated its growth for the past 3 weeks reaching the maximum since 2015. Does such a dynamic have a good reason or did the “bulls” overcompensate a little?
At the meeting on March 16, the Fed finally raised its key rate by 0.25 to 0.5%. The monetary policy tightening cycle has started, and now there are only questions regarding the speed of this tightening. In the Fed's official records, a rate hike by 0.25% at each of the 6 remaining meetings of this year is projected. Thus, by the end of the year, the rate may reach the level of 2%.
However, the very next week after the meeting, the Fed officials’ comments began to change market expectations. After the speech of a number of the American regulator representatives, the probability of a rate’s increase by 0.5% at once at the next meeting on May 4 was estimated at almost 70%. Also, at the May meeting, the Fed is expected to set specific start dates and pace of the Fed's balance reduction which will further strengthen the dollar.
Very few global financial regulators remain committed to a zero-rate policy. These are the central banks of Europe, Switzerland, and Japan. However, the Bank of Japan does not have much choice: low GDP growth rates together with an explosive increase in the price for all energy sources require maintaining a expansionary monetary policy, otherwise the economy will inevitably slide into recession.
The sharp policy divergence between the Fed and the Bank of Japan has led to a steady upward trend of the USDJPY currency pair. In recent weeks, the price has significantly accelerated its growth and moved up from the trend line. After reaching a local maximum of 122.4, a significant part of the “bulls” decided to take profits. The extreme overbought level of the RSI also indicates a correction.
Medium-term growth targets of USDJPY are the maximums of 2015: the autumn level of 123.7 and the summer level of 125.8.
The following trading strategy options can be suggested:
1) A buy of USDJPY after a corrective decline. As a buy signal, it is advisable to monitor the stabilization of the RSI indicator below the overbought level of 80. For reliability, it is also worth conducting a deal after the formation of reversal candlestick patterns, such as a hammer. Take profit 1: 123.7. Take profit 2: 125.8. Stop loss: in the form of Trailing stop.
2) A buy of USDJPY with correction to the level of 118.6. Take profit: 123.7. Stop loss: along the uptrend line, then Trailing stop.