USD/JPY Forecast: Volatility Amid Mixed Data

• During the trading session on Friday, we saw a lot of volatility in the USD/JPY pair, which makes quite a bit of sense considering that it was also Non-Farm Payroll Friday, which typically focuses on this pair as interest rate differential is a major driver of the movement.
• That being said, this is a market that has been paying close attention to the Bank of Japan, but now it appears that the labor numbers in the United States have given traders a lot to think about when it comes to the Federal Reserve.

Monetary Policy

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When looking at currency pairs, most traders in the retail space tend to ignore monetary policy, perhaps because it is somewhat difficult to get a handle on at times. Most of the time central bankers have no idea what they are doing, so a retail trader will always struggle. However, there are times when they are implicit and what they plan on doing, and it has become increasingly obvious that the Bank of Japan is concerned about inflation. Because of this, it’s likely that they will tighten monetary policy, and that should somewhat strengthen the Japanese yen. In fact, since Gov. Ueda stated a few days ago that inflation was indeed a problem for Japan, we have seen the yen strengthen.

That being said, the employment numbers out of the United States suggest that although the headline number missed, the internal numbers as far as the cost of employing someone continue to climb, and that could put pressure on the Federal Reserve because inflation just is not going anywhere. Simply put, if people have more money, they tend to spend more money. With this being the case, the Federal Reserve is likely to sit still for a while and the interest rate differential, although shrinking, still favors the US dollar quite drastically.

Because of all of this, I do anticipate that sooner or later the US dollar does recover against the Japanese yen, but we are clearly in some type of correction phase right now, and I’m not in a huge hurry to get aggressively bullish of this USD/JPY pair. However, if we break above the ¥153 level, I might start to put money to work. Underneath, I see the ¥150 level is the next major support level.

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