USD JPY poised for higher highs after pullback

Despite a modest slowdown in bullish momentum for the past several days, USD/JPY remains well-supported and its trend continues to push solidly to the upside. This trend is likely to continue into the new year as the fundamentals supporting dollar strength and yen weakness remain entrenched.

As always, much will depend on how the interest rate landscape plays out going forward. But as it currently stands, President-elect Donald Trump’s plans to stimulate growth and the Federal Reserve’s increasingly hawkish lean should serve to propel the dollar further.

As for the yen, the Bank of Japan remains on hold at negative interest rates with a massive stimulus program in place for the foreseeable future. This is coupled with the fact that financial markets – including both US and Japanese stocks – continue to surge to new highs, dramatically diminishing demand for safe-haven assets like gold and the yen. On the whole, not much of a reason currently exists for the yen to rally significantly in the near-term.

Of course, much could change as the still-unknown prospects for the new Trump Administration are gradually revealed. For the time being, however, the dollar remains the dominating force in global currencies while the yen continues to be the substantial laggard among its peers.

Against this backdrop, USD/JPY has undoubtedly made some spectacular gains since the US presidential election in early November. The currency pair’s sharp rise within the past two months has pared most of the losses made during the slide of the past year. This rally has been virtually unrelenting as the pair climbed rapidly to progressively higher multi-month highs. The latest culmination of this climb occurred last week when USD/JPY briefly reached above the key 118.00 level to hit a new ten-month high at 118.65. A modest pullback occurred early this week, but quickly recovered in the aftermath of the Bank of Japan’s policy statement. Now hovering under the key 118.00 level, USD/JPY could soon extend its surge to new heights, potentially approaching its January high. As long as the key 116.00 support level holds, any sustained re-break above 118.00 could boost USD/JPY towards its next major upside targets at the 120.00 psychological level followed by the noted 121.50-area January high.