USD/JPY: After the rapid run, a short-term correction is on the cards

Time to stop overlooking USD/JPY – the currency pair is moving fast and has hit 115.88, the highest since 2017. Yohay Elam, Analyst at FXStreet, explains what moves USD/JPY and what is next after hitting four-year highs.

USD/JPY provides the best reactions to yields and US data

“In general, USD/JPY tends to have the best reaction to yields and also to economic releases in the US. The yen is a safe-haven currency like the dollar, and therefore, does not fall when US data is weak – risk-off – or rise in response to good figures from America, risk-on.”

“As a safe-haven currency, the yen best reacts to geopolitical tensions. It can outperform the dollar when tensions rise around North Korea, and also between Russia and Ukraine. In such cases, it tends to decouple from yields. However, in the current environment, USD/JPY is trading in tandem with yields.”

“With the current low level of inflation, the Bank of Japan is set to stay put. That contrasts with the Federal Reserve, which is on course to raise rates in 2022, and the timing remains unknown. This uncertainty is what stirs the dollar. The yen is only a bystander.”

“In the shorter term, USD/JPY is trading in overbought territory according to the four-hour chart, as the RSI is well above the 70 level. That implies a correction. However, the trend remains to the upside and the pair could tackle 116 in short order.”