Fundamental vs technical analysis: spotlight on USDJPY
By Paul Reid
26 January 2024
When it comes to forecasting, some check the news first and others go straight to the charts. In this article, experts in fundamental analysis and technical analysis go head to head on the future of USDJPY.
Technical perspective - medium-term market overview
Li Xing Gan - Financial Markets Strategist
Weekly trend analysis
On the weekly timeframe, it is clear that USDJPY is riding a strong bullish wave. The consistent formation of higher lows and higher highs and an ascending channel signifies the strength of the prevailing uptrend. Recently, prices rebounded from a crucial support zone at ¥142.00, which aligned with the lower bound of the ascending channel and 78.6% Fibonacci retracement, hinting at the potential for a further price rally.
Anticipated future movements
An extended price rally toward the initial resistance zone at ¥151.80 is foreseeable. This level aligns with historical swing highs observed in October 2022 and November 2023, complementing the 78.6% Fibonacci extension derived from the impulse wave from July to November 2023.
A breakout above ¥151.80 could propel prices to the ¥154.50 resistance level, which coincides with the 100% Fibonacci extension and upper boundary of the ascending channel. This move will mirror the extent of the rally observed from July to November 2023.
Potential reversals and support levels
While the overall technical outlook remains bullish, traders should be mindful of potential pullbacks. A retracement towards the ¥142.00 support zone, encompassing both the 78.6% Fibonacci retracement and the lower boundary of the ascending channel, could present strategic entry points for those looking to capitalize on the broader bullish trend. However, a breach below the ¥142.00 support zone has the potential to trigger a decline towards the subsequent support level at ¥138.00.
Technical summary: navigating a bullish wave
In summary, USDJPY exhibits a robust uptrend, marked by consistently higher lows and highs. The recent rebound from the critical ¥142.00 support zone reaffirms the currency pair's resilience, signaling potential upward momentum to the ¥151.80 resistance. Hence, any short-term pullback in prices around the ¥142.00 support would offer strategic entry points for traders to ride the bullish wave. However, bear in mind that a breach below ¥142.00 could alter the bullish landscape.
Fundamental perspective - medium-term market overview
Agustina Patti - Financial Markets Strategist
Historical analysis and present situation
During 2022 and 2023 we have witnessed an aggressive monetary policy by the United States Federal Reserve. These fundamentals positioned the USDJPY pair sharply higher, as interest rate differentials between the US Federal Reserve and the Bank of Japan drove the dollar higher, to the detriment of the yen, which depreciated sharply during that period.
Now the situation seems to be changing course. The United States economy has shown signs of resilience, with the latest economic data above estimates, such as GDP Q4 2023, that expanded 3.3% well above the 2% estimated by analysts, along with the manufacturing PMI (50.3), and services (52.9) in January 2024.
Added to this, the Fed's favorite inflation indicator, Core Personal Consumption Expenditures (PCE), has been 2% in the last quarter of 2023, in line with market expectations (and with the Fed's inflation target).
On the other hand, although the BOJ maintained its ultra-loose monetary policy at its first meeting this year, the latest statements by the Governor of the Bank of Japan, Kazuo Ueda, revived speculation about a possible change in the country's monetary policy. Ueda said the likelihood of sustainably achieving the 2% inflation target with wage increases was gradually increasing and the central bank will re-examine its massive stimulus program if the trend continues.
Fundamental summary: possible trend reversal
So, on one hand, we have the United States showing signs of slowing inflation as well as economic resilience, despite high borrowing costs, which could lead to a rate cut in the short term.
On the other hand, Japan would appear to be close to achieving the 2% inflation target through wage increases, which would alleviate pressures on the Bank of Japan as it maintains its ultra-loose monetary policy.
Currently, according to the CME FedWatch tool, markets are pricing in a more than 50% probability that the Fed will begin cutting rates in March of this year. In contrast, the BoJ is signaling a possible gradual abandonment of its relaxed monetary policy and beginning to raise its interest rates.
Faced with this change in fundamentals, we could conclude that the upward trends observed in previous years could be coming to an end, with a bearish outlook in the medium term.
The fundamental and technical analyses provide contrasting forecasts for USDJPY. While technical analysis sees a continuation of the current bullish trend with clear resistance and support levels, fundamental analysis suggests a potential reversal to a bearish trend influenced by macroeconomic factors and monetary policies.
Which expert is right? Only time will tell. Whenever you are unsure about an asset, consider only acting when both schools of analysis are aligned. Also, keep in mind that with the right timing, both fundamental and technical forecasts may play out accurately, with perhaps a minor deviation.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.