JPY Q1 2022 Fundamental and Technical Forecasts

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JPY Q1 2022 Fundamental Forecast: USD/JPY, Fed, Labor Market Eyed

JAPANESE YEN FOURTH QUARTER RECAP

The anti-risk Japanese Yen had a mixed performance against its major peers throughout the fourth quarter of 2021. It weakened against haven-oriented currencies, such as the US Dollar and Swiss Franc. On the other hand, it found some strength against growth and cyclical-sensitive currencies such as the Australian, Canadian and New Zealand Dollars as volatility hit stocks.

INFLATION AND THE FED REMAIN THE FOCUS IN Q1 2022

For USD/JPY, the road ahead in the first quarter of 2022 will likely remain heavily glued to market expectations of how hawkish the Federal Reserve will be – see chart below. In December, the central bank doubled the pace of tapering asset purchases, which will now see it end in early 2022. This will likely give the central bank maneuverability should it need to raise rates sooner than expected.

This will of course depend on how inflation evolves. Headline price growth is at its fastest pace in almost 40 years in the United States. Expectations are that price growth will remain above the central bank’s target next year, with Core PCE running around 2.7% in 2022. However, a key risk could come if inflation expectations become “de-anchored.”  

DECEMBER 2022 FED RATE HIKE BETS VS. USD/JPY

Chart Created Using TradingView

THE LABOR MARKET MAY KEEP THE FED ON ITS TOES, WILL USD/JPY RISE?

When inflation expectations are anchored, it typically means that short-term price growth does little to impact long-run estimates. This could be due to people expecting the Federal Reserve to maintain its inflation target down the road. However, if consumers anticipate inflation to linger instead, then those estimates can become “de-anchored”.

This can occur when workers, facing high inflation, demand higher wages to combat losing purchasing power. Businesses can respond by driving up costs of products to counter paying higher salaries. This creates a spiral -- difficult for a central bank to counter. With that said, the Federal Reserve has ample room to tighten monetary policy given how loose policy has become in the post-Covid world.

How does the US labor market look? As the chart below shows, the labor force participation rate remains stubbornly below pre-Covid levels. This is despite the country recovering about 80% of jobs lost since the Covid shock in 2020. On the plus side, jobless claims are at their lowest since 1969 while the number of openings is at their highest on record.

These trends hint that the country might be able to accommodate a surge in labor force participation without bringing up unemployment too quickly. If new workers entering the labor force seek higher wages amid elevated inflation, then salaries could rise, pushing up prices and opening the door to a more hawkish Fed. That could keep the focus for USD/JPY tilted upward. Another consequence might be more stock market volatility. This is something the JPY may capitalize against AUD, CAD and NZD.

WATCHING THE US LABOR MARKET IN 2022

Chart Created Using TradingView

 

By Daniel Dubrovsky, Strategist, 26th December 2021. DailyFX

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JPY Q1 2022 Technical Forecast: USD/JPY Chart Points Higher to Kick Off the Year

YEN WEAKNESS LOOKS SET TO CONTINUE AFTER USD/JPY RECORDS STRONG Q4’21

The Japanese Yen saw significant weakness against the US Dollar in 2021. USD/JPY gained in all but three months last year, with the currency pair hitting the highest level since January 2017 in November. US Dollar bulls controlled the narrative in Q4 2021, which puts prices on a strong footing to rise further in the new year.

USD/JPY made several key technical victories last year, including a climb above a descending trendline from the early 2017 swing high. That trendline capped upside movements in the pair for the preceding year until March 2021, when prices pierced above the level. The 200-week Simple Moving Average offered confluent resistance, but the levels turned to support, and prices subsequently broke higher. That strength saw a clean break above the psychologically imposing 110 handle.

USD/JPY MONTHLY CHART

Chart created with TradingView

USD/JPY DOWNSIDE APPEARS LIMITED WITH ROBUST SUPPORT

The weekly chart highlights possible levels of resistance and support that may appear in Q1. The 61.8% Fibonacci retracement level from the 2015 high to 2016 low has already showed to be a sticky point in Nov. A break above that, however, puts focus on the late 2016 swing high at 118.665. Shortly above that level lies the 78.6% Fib, with a full retracement to the 2015 multi-year high serving as the next likely resistance point.

Alternatively, a move lower has several potential support levels. The rising 100-day SMA offers the first line of defense against a bearish move, with the moving average tracking shortly below price levels in December. The 200-day SMA sits in a nearly confluent position along the 110 psychological handle and the 38.2% Fibonacci retreat. The 2017 trendline comes into play just below those levels.

One point of concern is a negative divergence between prices and the Relative Strength Index (RSI), highlighted in red in the chart below. The divergence suggests that upside energy may be waning. USD/JPY bulls will want to see RSI break above the level around 75.54 the next time prices rally higher to break the negative divergence.

USD/JPY WEEKLY CHART

Chart created with TradingView

By Thomas Westwater, Analyst, 25th December 2021. DailyFX