USD/JPY Outlook: Yen to Strengthen with a BoJ Policy Shift

• The yen has steadily gotten stronger, with inflation at multi-decade highs.

• The yen has risen by more than 11% since last October.

• Citi strategists have set a target of 125 per dollar for the yen.

Today’s USD/JPY outlook is bearish as investors anticipate a possible shift in BOJ policy. Investors are preparing for a regime transition in the global financial system. The Bank of Japan might soon abandon the policies that have weakened the yen for decades.

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The BOJ made the yen an ideal funding vehicle by flooding its financial system with cheap cash and maintaining interest rates below zero for years. As a result, Japanese investors transferred trillions of dollars abroad in quest of higher profits.

With Japanese inflation hitting multi-decade highs, the yen has steadily gotten stronger. Japan is the last holdout in the rush to hike rates globally.

This means that portfolio managers must now consider a stronger yen when choosing international stocks, something they have not done in years.

The yen has risen by more than 11% since it hit a 30-year low against the dollar last October.

Kazuo Ueda has emphasized the necessity of ultra-loose monetary policy but hinted that rates might rise to control inflation. He wraps up his first two-day meeting as BOJ president on Friday.

The BoJ may consider removing its yield curve control (YCC) policy. Japanese inflation is at its highest level in four decades, excluding energy. Some market observers believe a shift in policy may occur this week.

Citi strategists have set a target of 125 per dollar for the currency, down from its current level of 134.

USD/JPY key events today

Investors expect important data from the US to shed light on the economy’s health, the labor market, and the housing sector. These releases are the GDP, initial jobless claims, and pending home sales.

USD/JPY technical outlook: Bears pause at the 133.50 support

USD/JPY has successfully broken below the trendline support in the 4-hour chart. However, it was rejected below the 133.50 support level. Although the price made a lower low, showing a downtrend, a close below this support is needed to confirm bearish strength.

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The price has returned to retest the 30-SMA resistance and looks ready to push lower. If the 30-SMA holds strong resistance, the price will likely break below 133.50. It would then fall to 132.25 support.

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