The USDJPY currency pair hit a 1.5-year high last week before undergoing a slight correction. The price retreated to 157.5, a level that marked the peak of the November and December rallies. This floor now acts as support, additionally backed by the uptrend line extending from September lows. The US dollar has recently resumed its advance against the yen, with bulls targeting 159.5 and the most important 160.0 threshold next.
Last week’s local correction pulled the Relative Strength Index (RSI) away from overbought territory, clearing the way for further gains. The Stochastic Oscillator has already generated a buy signal. Meanwhile, the 50-day moving average and all Bollinger Bands are still looking up. Given this technical setup, it is smarter to hold long positions until the pair approaches the 159.5–160 range. Then, currency intervention by Japanese authorities is highly likely, and the risk-to-reward ratio would become less appealing.
Despite monetary policy divergence between the US Federal Reserve (Fed) and the Bank of Japan (BoJ), USDJPY maintains bullish momentum. Market players see Prime Minister Sanae Takaichi’s actions as a reason for this dynamic. Unlike Donald Trump, she leaves the national regulator’s operations undisturbed. However, both officials are on the same page regarding tax cuts and fiscal stimulus. To secure a majority and implement the planned reforms, Takaichi scheduled early elections for February 8.
Reuters and Bloomberg analysts are seriously concerned that Japan’s Prime Minister may share the same fate as Liz Truss from the UK. Her plans to ramp up expenses led to the pound crashing in fall 2022, forcing the official to step down. Takaichi may be too committed to reverse course on her proposed tax cuts and spending hikes, but it's still not clear how these reforms will be funded. As a result, Japan's bond market is under heavy selling pressure, and traders' negative sentiment is extending to the yen.
Take a look at the following trading strategy:
Buy USDJPY at the current price, with Take profit at 159.5 and Stop loss at 157.5.
This content is for informational purposes only and is not intended to be investing advice.
