FX Outlook on USD/JPY for H2 2022

FX Outlook on USD/JPY for H2 2022

As one of the most traded currency pairs in the forex market, the USD/JPY pair has always been an essential indicator to traders. In this blog post, we dig into key factors behind the USD/JPY upswing in Q2 from economic status and policy perspectives, and finally some outlook for the second half of 2022.

FX Outlook on USD/JPY for H2 2022

USD/JPY has been rising since the start of the year. The pair has gained more than 18% due to the greenback’s upward momentum.

In March 2022, the pair broke the 120 psychological level crossing its 2015 high. USD/JPY broke the 130-barrier too in June 2022.

At the time of writing, the pair is trading at 136.97.

USD/JPY all-time chart

So, considering the Q2 price action, what can we expect from USD/JPY for the second half?

In this guide, we’ll discuss the factors affecting the USD/JPY and present an outlook for the pair.

Factors affecting USD/JPY

Let’s talk about some factors influencing the movement of USD/JPY.

The economic status of the US

Rising gas costs, a hawkish Federal Reserve, and a generally deteriorating economy are the three concerns confronting the United States.

In the first three months of 2022, the US economy shrunk at an annual rate of 1.6 percent.

It was the first dip in GDP, the broadest measure of economic production, since the second quarter of 2020, when the country was in the grip of COVID-19, and it came after a robust 6.9 percent expansion in the last three months of 2021.

According to the Bureau of Economic Analysis’ GDP fell at an annual rate of 1.6 percent in the first quarter of 2022.

US GDP growth for Q1 2022

Worsening inflation

Inflation continues at 40-year highs, and the Fed shows no signs of pausing its rate rises to counteract increasing costs, while consumer confidence is at a historic low.

In response, the Fed accelerated its rate-hiking strategy, raising its short-term benchmark rate by three-quarters of a percentage point, the most significant rise since 1994.

The Fed hopes for a “soft landing,” i.e., reducing economic growth just enough to bring inflation down to its objective of 2% without creating a recession.

What’s up with the Feds?

According to meeting minutes released on July 6, Federal Reserve officials highlighted the need to battle inflation even if it meant slowing an economy that appeared to be on the verge of a recession in June.

Members predicted that another 50 or 75 basis point hike would be approved at the July meeting, on top of the 75 basis point increase authorized in June. One basis point equals one-tenth of one percentage point.

Fed members at the meeting voiced optimism about the economy’s longer-term trajectory if they reduced GDP predictions to 1.7% in 2022 from 2.8% in March.

Greenback in green

The USD has been upward since the start of the year.

Since Russia invaded Ukraine, the greenback has risen against most major currencies, reaching a nearly 20-year high in mid-May.

Fears of a worldwide economic downturn and predictions of a hawkish Fed have bolstered the USD’s standing as a safe haven.

With the Fed rate hike and the geopolitical situation, there is a chance that the USD will continue its momentum in Q2.

DXY price chart

The economic status of Japan

According to Cabinet Office figures, the world’s third-largest economy shrank at an annual pace of 0.5 percent. It was less than the 1% decrease predicted in the May preliminary estimate of Japan’s GDP.

Japan has been fighting deflation, or price declines, for many years. Low wage growth and a dwindling population have hindered economic output and business investment.

What does BOJ say?

On July 11, Bank of Japan Governor Haruhiko Kuroda cautioned of “extremely high uncertainty” about the economic outlook, emphasizing the central bank’s willingness to provide stimulus if required to support a weak recovery.

As part of its efforts to raise inflation to its objective of 2%, the BOJ vows to maintain short-term rates at -0.1% and the 10-year bond yield at about 0% under its yield curve control policy.

Kuroda has championed a program to raise near-zero inflation to about 2%, but progress has been modest until recent increases in global oil and commodity prices.

What’s up with JPY?

One of the concerns for BOJ is the weakening JPY.

The yen has fallen against the dollar in anticipation that the BOJ would maintain an ultra-easy monetary policy, thus increasing the gap with the US Federal Reserve’s aggressive rate rise plan.

USD/JPY outlook: What can we expect?

So, what will the year’s second half look like for USD/JPY? Again the factors we mentioned above will keep on affecting USD/JPY.

Hawkish Fed

A second-quarter of sluggish growth fits a rule-of-thumb criterion for recession, with first-quarter growth down 1.5%.

In their recent meeting, Fed remains hawkish with increased concern about inflation and intentions to adopt a more restrictive stance to cool rising prices.

The latest meeting minutes appear to imply that the Fed will stay aggressive, with 0.5-percentage-point raises replacing 0.25-percentage-point move and officials indicating that they will come down on the side of overtightening.

Markets have already moved their emphasis away from inflation and toward growth, particularly following the large June boost and ahead of a possible similar increase this month. Whether inflation will stay high is unclear when the Fed will shift its focus.

So, the greenback’s safe-haven status will rely on the Fed’s stance. However, there is a chance that the USD can continue its momentum in the second half.

Dovish BOJ

While inflation surpassed 2% for the second month in a row in May, owing mostly to rising oil prices, Kuroda has dismissed the possibility of a near-term rate rise, believing that such cost-push inflation will be temporary unless accompanied by greater wage growth.

Although a weak yen benefits Japanese exporters by increasing the value of their foreign profits, economists argue it also implies a poor economy.

Rising interest rates in the United States and other nations, as opposed to Japan’s near-zero interest rates, will likely keep the yen weak for some time.

Bottom Line

With the Fed’s hawkish stance and BOJ maintaining its dovish policy, there is a chance that USD/JPY can further move upward. However, it will depend on how the Fed acts to curb inflation.

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