USD/JPY forecast: 105.20 is the next target as bears remain in control

  • USD/JPY pair declined by 15 basis points today following FOMC decision and weak data from Japan.
  • The pair crossed moved to the important 50% Fibonacci retracement level.
  • The USD/JPY forecast is bearish because bears will attempt to test the 61.8% retracement level at 105.19

The USD/JPY pair retreated in early trading as traders reflected on the actions by the Federal Reserve and a slew of economic data from Japan.

USD/JPY reacts to FOMC decision

The Federal Open Market Committee (FOMC) concluded its two-day meeting yesterday. The officials voted unanimously to leave interest rates unchanged between 0.00% and 0.25%. They also committed to continue supporting the economy as it continued to deal with the coronavirus pandemic. Most importantly, Jerome Powell said that the Fed would leave rates low until the rate of unemployment stabilises. This could be more than a year from now.

The FOMC decision came a few days after the Bank of Japan voted to leave rates unchanged. In the shortened meeting on Monday, the bank also said that it would continue with the open-ended quantitative easing program.

Japanese yen gains amid negative data

As with the Nikkei 225 index, the Japanese yen rose even with the negative economic data that was released earlier today. The data showed that housing starts declined by 7.6% in March. This was significantly better than the expected contraction of 16.0% and the previous month’s decline of 12.3%. It is worth noting that this slowdown happened before Japan announced its state of state of emergency. As such, the starts in April will be significantly worse.

In the same month, household confidence declined from the previous 30.9 to 21.6. As the state of emergency is extended, this confidence will likely continue moving lower.

Meanwhile, the retail sector is not doing well even as the USD/JPY declines. This is mostly because many people in Japan are worried about their future. In fact, many companies such as Nissan and Toyota have warned that they will cut production. This means that more jobs could be lost. Data released today showed that retail sales declined by 4.6% in March after rising by 1.6% in the previous month. The industrial production data also declined by 3.7% in March after declining by 0.3% in February.

Why is the Japanese yen gaining?

There are two reasons why the yen is gaining. First, a dovish Federal Reserve tends to push the US dollar lower. As the dollar weakens, its peer currencies gain. In fact, the dollar index has declined by about 25 basis points today. Second, investors are possibly questioning the ongoing rumours about a coronavirus cure. The yen tends to gain when risks are rising. In fact, the VIX index is up by more than 15 basis points today.

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USD/JPY forecast

Let us now look at the technical USD/JPY forecast. Looking at the four-hour chart, we see that the USD/JPY pair has been moving lower, being guided by the green trend line and the 50-day exponential moving average. The pair also managed to reach the important 50% Fib retracement level. This means that bulls are in total control and will now attempt to test the 61.8%  retracement level of 105.20.

On the other hand, I will consider any move above 107.67 as the invalidation point for this USD/JPY trend. This price is at the intersection of the 38.2% retracement and is slightly above the 50-day EMA.

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