USD/JPY Forex Forecast – Supported by Divergence in Central Bank Monetary Policies

The Dollar/Yen is edging higher on Thursday and in a position to breakout over its recent minor top at 136.917 as traders shift their focus to the prospect of higher global interest rates.

The divergence in monetary policy between the hawkish Federal Reserve and the ultra-dovish Bank of Japan (BOJ) is not only providing support from the U.S. Dollar, but also driving the upside momentum. Essentially, the Fed is expected to keep raising rates and the BOJ is set on holding policy steady. This makes the dollar a more attractive asset than the Yen.

At 08:29 GMT, the USD/JPY is trading 136.586, up 0.390 or +0.29%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.05, up $0.84 or +1.25%.

Data Dependent Driven Up Trend Continues

Data on Wednesday showed U.S. manufacturing contracted for a fourth straight month in February, but there were signs that factory activity was starting to stabilize, with a measure of new orders pulling back from a more than 2-1/2-year low.

However, ISM Manufacturing Prices Index jumped from 44.5 to 51.3, well above the 45.5 forecast. This is a bad omen for the inflation outlook.

BOJ Policymakers Maintain Ultra-Dovish Stance

While U.S. Treasury yields are soaring, Japanese bond yields are being dampened as BOJ policymakers reiterated their ultra-dovish stance earlier this week.

Incoming BOJ Governor Kazuo Ueda emphasized now may not be the time to abandon ongoing policies given current economic circumstances. This essentially means that policymakers are going to stick to their massive quantitative easing program for the foreseeable future without significantly adjusting the yield curve control scheme. Some say, it may be a year or more before they make a significant change to policy.

In the meantime, the Dollar is likely to remain more attractive to investors because of the higher yields in the United States, while the Yen’s appeal will be limited due to the extreme low yields in Japan.

Short-Term Outlook

Technically speaking, the USD/JPY is in an uptrend. A trade through 136.917 will reaffirm the uptrend and could create the upside momentum needed to fuel a rally into the next main top at 138.173. Ultimately, we think the Forex pair is headed for 139.586 to 142.503.

In the U.S., the focus will be on Weekly Jobless Claims, Revised Nonfarm Productivity and Revised Unit Labor Costs.

Weekly Jobless Claims will give investors a few clues about the strength off the labor market. Traders are looking for a slight rise from 192K to 196K. The new number is expected to reflect a tight labor market, which supports higher rates.

Revised Unit Labor Costs are expected to come in at 1.6%, up from 1.1%. This is another indicator of inflation. The expected rise will reflect the presence of rising inflation, which also supports the notion that U.S. rates will remain higher for longer than expected.