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A forecast covering a long time period such as a year should account for both technical and fundamental factors that will shape the price movements of the currency pair in question.

Technical Factors

Although in recent years this pair has been seen as a ranging rather than trending pair, the statistics actually show that over recent years it has tended to exhibit quite a lot of volatility. Since 2001 it has averaged an annual volatility of just over 14%, and a median volatility that is almost exactly the same. The pair’s volatility has been rising since 2011, and last year reached a relatively very high number of over 20%.

This volatility of course was very directional: the sharp fall in value of the JPY was the big story of late 2012 / early 2013.

This can be interpreted in two ways: that the pair is due some consolidation after its historically large move up, or alternatively, that a continuation of the move with at least a typical amount of volatility is more likely. Assuming the latter, this would suggest that the price in 2014 will rise no higher than about 117.50, and fall no lower than about 87.50. An approximate range of 2,000 pips could be expected.

Chart Picture

Turning to the monthly chart, we have recently begun to see some signs suggesting that the price is on its way up again after breaking bullishly out of a consolidating triangle that formed during the summer months. At the time of writing, the price has broken up through several key highs and is not far away from its 5-year high of 103.73.  The price made a higher high and higher low in 2013 than it did in 2012. The 50% Fibonacci retracement level of the 2007-11 large downwards move has also been well surpassed. As shown in the chart below, the technical evidence suggests a continuation in 2014 of the strong upwards move.

There are logical support and resistance levels marked on the chart that correspond roughly to a typical amount of yearly volatility this pair has experienced over recent years, marked in red at 110.66 and blue at 93.81. These levels are good candidates to be the highs and lows of 2014.

(USDJPY01)

USDJPY 2014 forecast technical fundamental analysis outlook and sentiment

Fundamental Factors

It seems that the fortunes of the USD during 2014 will be most affected by how long the Fed has to delay implementing the tapering program. As long as this is delayed indefinitely, there is no reason to think that the USD will rise, and so the uptrend would lack impetus from the USD side. However, when the Fed makes an announcement that makes the market believe that tapering is seriously on its way, this will probably make it easier for the USD to rise, and so would refuel a continuing rise in USD.

It seems that the fortunes of the USD during 2014 will be most affected by how long the Fed has to delay implementing the tapering program. As long as this is delayed indefinitely, there is no reason to think that the USD will rise, and so the uptrend relies more upon weakness in the JPY rather than strength in the USD. However, when the Fed makes announcement that makes the market believe that tapering is seriously on its way, this will probably make it easier for the USD to rise, and so would be likely to provide an impetus to fire this pair upwards.

For the JPY, there is no shortage of fundamental reasons why the currency should continue to weaken. Japan is facing a problematic future with a shrinking, ageing population and a frightened younger generation that has suffered through many years of economic stagnation. Japan has no choice but to engineer a dramatic depreciation of its currency, and had to do little work to engineer it beyond signaling that it would not try to fight the depreciation.

We did reach a point a few months ago where the central bank and political echelon signaled that the move had gone far enough for their taste and that did bring about some consolidation. However the continued positioning of the JPY as the world’s politically weakest currency has taken on a momentum of its own.

Conclusion

Bringing it all together, we can expect this pair to continue rising up to around 110.00 and very possibly even higher, provided the Japanese Central Bank does not signal before that moment that in its view the rise has gone too far, which may slow the rise. It is hard to see the pair falling below the recent consolidation’s floor of 93.81.

About the Author:  Al Alp Kocak has been trading forex since 2003. He writes technical analysis based on Japanese candlesticks and Ichimoku Kinko Hyo and is a senior educator at  FX Academy, where he provides trading strategies to traders at all levels.

Further reading:  FX Outlook 2014 – Conditional Dollar Strength