Bullish USD/JPY Outlook at Risk as Japanese Inflation Picks Up

Fundamental Forecast for Japanese Yen: Neutral

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A further pickup in market sentiment should continue to fuel the near-term rally in the USD/JPY, but the fundamental developments coming out next week may keep the dollar-yen contained within the wedge/triangle formation as the Bank of Japan (BoJ) remains upbeat on the economy.

The recent rise in risk appetite may gather pace as the U.S. earnings season boosts trader confidence, and the ongoing themes in the financial markets may continue to heavily influence the USD/JPY as it remains highly correlated to equity prices.

Nevertheless, it seems as though the BoJ is in no rush to further expand its asset-purchase program as Governor Haruhiko Kuroda remains confident in achieving the 2% target for inflation and another uptick in the region’s Consumer Price Index (CPI) may continue to alter the policy outlook as market participants scale back bets of seeing a larger quantitative-easing (QE) program. With that said, we may see a growing number of BoJ official show a greater willingness to carry the current policy into the second-half of 2014, and the USDJPY may continue to congest ahead of the next central bank meeting on April 30 as Fed Chair Janet Yellen remains reluctant to move away from the zero-interest rate policy (ZIRP).

As a result, the USDJPY may continue to face narrowing ranges as it consolidates within the wedge/triangle formation from earlier this year, and it appears as though we’re going to need a key fundamental catalyst for a major move in the pair as market participants mull the outlook for monetary policy. - DS