The Weakening of the Japanese Yen and the Impact of the USD
The Japanese Yen (JPY) continued to weaken this week, facing a strong US Dollar (USD). The USD/JPY pair is now near multi-month highs. The market is paying attention to when the Bank of Japan (BoJ) will change its interest rate policy, which will further weaken the Yen.
A key factor undermining the yen is the widening yield differential between the US and Japan. US government bond yields continue to rise sharply following signals of tightening monetary policy from the US Federal Reserve (Fed). This makes the US dollar more attractive while the Japanese yen remains lower, causing capital to flow out of this currency.
Japan's economic situation is not strong enough to support the Yen.
Although economic data from Japan showed an expansion in the services sector in December, it was not strong enough to change expectations for a BoJ rate hike. Service sector PMIs continued to show improvement, but analysts remain skeptical that the BoJ will change monetary policy quickly. The BoJ is expected to raise interest rates to 0.50% by the end of March, but there is still much uncertainty surrounding the decision.
USD/JPY exchange rate may continue to increase in the coming time
The USD/JPY pair is currently facing strong resistance in the 158.00 area. A break above this level could see further gains towards 159.00 and even the psychological 160.00 level. However, if the Yen finds strong buying interest at 157.00, the pair could correct lower, with the next support levels around 156.65 and 156.00.
With important economic events coming up, including US employment reports and other macro data, the market will continue to closely monitor signals from the BoJ and the Fed to assess the next direction of the Japanese Yen. Meanwhile, the stability of the US dollar continues to be the main factor keeping the Yen from recovering.
