The USD/JPY price is still in a strong uptrend as the divergence between the Federal Reserve and the Bank of Japan (BOJ) continues. The USD to JPY exchange rate is currently trading at 136.12, which is a few points below the year-to-date high of 136.55. It has risen by almost 8% from its lowest level in May.
Why is the Japanese yen sliding?
The yen to USD exchange rate has been in a strong bullish trend in the past few years. It has rallied by over 34% from its lowest level in 2020 and by 20% this year alone. This price action is mostly because of the ongoing divergence between the Fed and BOE.
The Fed has decided to be extra hawkish in a bid to fight inflation. As a result, it has decided to embrace the quantitative tightening policy that will see it reduce its balance sheet. The bank has also made a 125 basis point rate hike this year and hinted that more hikes were on the way. Analysts expect the bank to hike by either 0.50% or 0.75% in its upcoming meeting.
The BOJ, on the other hand, has become a major outlier among central banks. It has maintained a dovish tone even as Japan sees the biggest rate of inflation in years. In its decision last week, the BOJ decided to leave interest rates unchanged at -0.10. It warned that it could ease monetary conditions in a bid to support the economy.
The next key catalyst for the USD/JPY price will be the upcoming testimony by Jerome Powell. In it, he will likely explain why the bank misjudged inflation in 2021 and whether the rising rates will have a negative impact on the economy. Data published on Tuesday showed that existing home sales dropped sharply in May.
USD/JPY forecast
The daily chart shows that the USD to JPY price has been in a strong bullish trend in the past few days. It has moved above the important resistance level at 131.16, which was the highest point on April 29th, It is also being supported by the 25-day and 50-day moving averages while the MACD is above the neutral point. Further, it formed a break and retest pattern.
Therefore, the path of the least resistance for the USD/JPY pair is bullish, with the next key level to watch being at 138. A drop below the support at 131.16 will invalidate this view.
