FX.co ★ Inadequate oversold USD/JPY

At the end of last week, the dollar-yen pair went into a tailspin. Many analysts consider such a strong decline absolutely unreasonable and predict the asset's speedy recovery.

The steep peak of the dollar

The US inflation data published last week turned out to be cooler than expected. This has led to a sharp increase in speculation about a possible slowdown in the pace of rate hikes in America.

A sharp weakening of hawkish market expectations sent the dollar into free fall. The dollar index has fallen by 3.6% in the last two sessions, which was its most serious decline since March 2009.

Interestingly, the yen won the most in this situation. Over the past seven days, its rate has increased by almost 6% against the greenback. The last time such a significant weekly growth of the Japanese currency was recorded was back in 2008.

The rapid rise of the JPY was facilitated by growing optimism that the monetary divergence between Japan and the United States will begin to shrink.

Recall that the divergence in the monetary policy of the dovish Bank of Japan and the hawkish Federal Reserve was the main reason for the strong weakening of the yen this year.

Now, when there were hopes that the US central bank could reduce the intensity of its anti-inflationary struggle, the balance of power in the dollar-yen pair has changed dramatically.

On Friday, the USD/JPY asset fell to a 2.5-month low at 138.50. This is 8.6% less than the peak value of 151.95 reached by the asset in October.

Despite the prolonged series of losses, many analysts are in no hurry to talk about a reversal of the bullish trend in this dollar major. Let's figure out why.

It's too early to bury USD

According to most experts, the last sale of the dollar paired with the yen was extremely emotional. Having received encouraging data on inflation in the US, traders clearly jumped to conclusions.

Of course, price growth in America is slowing down, but this does not mean that now the Fed will turn from a hawk into a dove overnight. The US central bank still has a lot of work to do in order to bring inflation back to the target level. Christopher Waller, a member of the Fed's Board of Governors, reminded the market about this on Sunday.

The official stressed that before starting to slow down, the central bank should make sure that the price increase has really gone down. And this will require several more inflation data.

– Apparently, the Fed is not going to loosen its tight grip just based on the data for one month, – said Juntaro Morimoto, currency analyst at Sony Financial Group. – Probably, this week we will hear several more similar comments from other members of the US central bank. This should help the USD/JPY pair strengthen to at least 145.

The possible recovery of the major in the short term is also indicated by the fact that now the dollar-yen asset looks too oversold.

According to experts, the greenback should recover in the near future against the JPY, as it has experienced an unreasonably strong drop.

The fundamental advantage is still on the dollar's side, because the Fed plans to raise rates further, and the BOJ is not going to change its ultra-soft monetary policy yet.

Nevertheless, most strategists are inclined to believe that even if the USD/JPY pair returns to growth, the yen is unlikely to return to its loud anti-records.

– In recent days, the quotation range has shifted significantly lower. Now the 145 mark has turned from a support level into a resistance level," says Money Partners analyst Toshifumi Takeuchi. – Even taking into account the hawkish comments of the Fed members, the dollar-yen asset will most likely not be able to exceed the 145 threshold this year.

USD/JPY pair now

Currently, the USD/JPY pair is trading just above the 139 level. It started the new working week with growth, rising by 0.3%.

A little support for the asset was provided not only by the hawkish comment of Fed member C. Waller, but also by the morning statement of BOJ Governor Haruhiko Kuroda.

At the beginning of Monday, Kuroda once again stressed his commitment to a soft monetary exchange rate amid growing uncertainty about the future prospects for Japan's economic growth.

According to analysts' forecasts, the USD/JPY pair is likely to receive another boost for growth tomorrow, as the BOJ's dovish rhetoric may significantly strengthen in light of new data on Japan's GDP.

The Japanese economy is expected to show annual growth of 0.3% in the third quarter, which is significantly lower than the previous indicator (0.9%).