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USD/JPY. Optimal medium-term strategy – longs on downward pullbacks

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The USD/JPY pair last week updated a 5-year high, reaching 116.36. The dollar in early 2022 was strengthening its positions everywhere, while the yen was getting cheaper against the background of the dovish position of the Bank of Japan. But despite the growth’s momentum, the pair failed to settle within the 116th figure. Bulls were forced to retreat and take a defensive position at the base of the 115th price level. Today, USD/JPY bulls rushed into battle again, on the eve of Federal Reserve Chairman Jerome Powell’s most important speech in the Senate and the equally important release of data on inflation growth in the United States. In the other dollar pairs of the “major group”, the greenback behaves somewhat more modestly.

In general, the pair has been within the framework of a pronounced northern trend since the beginning of December – in five weeks the price has gone up more than 300 points. But this is only the last cycle of the upward movement. If we look at a broader time period, we will see that the flywheel of the upward trend has been unwinding since January 2021. The pair gradually moved up throughout the year, even despite a multi-month wide-range flat. So, from April to July, USD/JPY fluctuated within the range of 109-111 against the background of the spread of the delta strain of coronavirus. The yen was in high demand as a protective asset, while the US currency was temporarily out of business. But as soon as the level of anti-risk sentiment in the market decreased, dollar bulls took the helm again.

Today, the US dollar is back on the horse. Downward pullbacks of USD/JPY are possible only due to a temporary weakening of the greenback. The Japanese currency does not have its own arguments for breaking the trend. The “coronavirus factor” is also not an ally of the yen. At the end of November last year, when Omicron had just appeared, USD/JPY bears were able to take advantage of the situation: literally in a day, the pair collapsed by more than 200 points. But then the uncertainty was more frightening: rumors around the new strain were very diverse, and almost all were pessimistic.

Now the situation is different: the coronavirus continues to set new anti-records (thanks to the same Omicron), but the yen is not the beneficiary of the situation. Judge for yourself: literally today, the United States reported that 1,350,000 Covid cases were registered in the country during the day. This is a new world record for daily growth. The previous one was installed quite recently – on January 3 (1,030,000 cases) – and also in the US. Meanwhile, the head of the World Health Organization said today that over the next 6-8 weeks, more than half of Europeans will be infected with Omicron. The WHO recalled that the new strain has a high ability to spread, because the mutations it has allow it to be more easily fixed on human cells.

However, against the background of such a news flow, the Japanese currency is not in high demand. Partly due to the fact that the authorities of key countries of the world have relied on strengthening the vaccination campaign (the introduction of a booster dose) and strengthening quarantine restrictions for unvaccinated citizens. Only some states (for example, the Netherlands or Austria) decided to introduce lockdowns following the example of 2020. In addition, Pfizer and Moderna announced the release of vaccines against Omicron yesterday. Representatives of the pharmaceutical giants note that the drugs will also be effective against other strains circulating in the world.

The financial world has focused not on the coronavirus threat, but on strengthening hawkish expectations about the Fed’s further actions. Even if we ignore Powell’s speech in the Senate today, we can conclude that the rhetoric of the representatives of the Fed has noticeably tightened recently. In particular, the head of the Federal Reserve Bank of Atlanta, Rafael Bostic, said today that it would be “very reasonable” to go for the first interest rate increase already at the March meeting. In addition, he said that three rounds of rate hikes are expected within the current year, “and in case of further acceleration of inflation – four rounds.” A similar statement was made today by the head of the Federal Reserve Bank of Cleveland, Loretta Mester. According to her, she will support a rate hike in March (this year she has the right to vote in the Committee) if the American economy at that time looks “at least the same as now.” The hawkish position was also voiced by the head of the Federal Reserve Bank of Kansas City, Esther George. Although she did not talk about any specific time frame, she made it clear that she was ready to support the representatives of the “hawk wing”. In particular, George said that the current accommodative policy of the regulator “does not correspond to the economic forecast.”

It is worth noting that if the release of data on the growth of US inflation tomorrow comes out at least at the forecast level (not to mention the green zone), the probability of the first rate hike at the March meeting will increase almost to one hundred percent. And although this scenario has already been partially taken into account in current prices, the dollar will receive some support in any case – especially when paired with the yen. In the medium term, the USD/JPY pair will be able not only to test the resistance level of 116.00 (the upper BB line on D1), but also to update the long-term price high, which is set at 116.36. In other words, longs are still a priority, and, therefore, it is advisable to use any downward pullbacks to open long positions.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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