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Know why March was an excellent month for the USD/JPY

USD/JPY Forecast

The US dollar and the Japanese yen are two of the most liquid currencies in the world. The USD/JPY is a highly-active currency pair, with many traders around the globe trying to identify price patterns, such as trend reversals or breakouts.

Short term currency trading can be daunting for beginners. There are many factors that play into whether a forex trade will result in a loss or profit for you, and this article will outline them all.

The pair gained 5.8% during the last two weeks in March

In March 2022, the USD/JPY posted its biggest two-week percentage gain against the EUR in more than a year as the dollar strengthened amid rising demand for higher-yielding assets. The pair gained 5.8% during the last two weeks in March 2022, its best performance since a 6.3% rally in mid-April 2019. The last time the USD/JPY rose more than 5% in a two-week period was in early January 2021, when it rose 6.1%.

The dollar’s gains accelerated after Federal Reserve Chairman Ben Bernanke said on March 17 that future Fed rate increases may be limited by subdued inflation, which lifted prices of longer-term Treasuries to record highs. Trading for the pair began on March 21 with a value of 1.0111 and continued to rise at the close of trading on 22nd , rising another 0.4% to 1.0143 USD/JPY.

The USD/JPY pair closed at 1.0144 on Wednesday, March 23

The next day Thursday, March 24, the pair gained 0.2%, closing at 1.0152 and continued to rise against the EUR and GBP on Friday, March 25 by another 4%.

On Thursday April 18th 2022 , the Federal Open Market Committee increasing the target range for its federal funds rate by 25 basis points with a unanimous vote 8-0 vote—the fifth hike since December 2018 under Chair Jerome Powell’s leadership—to a range of 2% to 2.25%.
The tightening by the Fed contributed to the dollar’s rally of 2.5% vs the JPY on Friday. The pair closed at 1.0161 on Friday April 8th.

What is the reason behind the success of USD/JPY?

The proportion of Japan’s gross domestic product to the US economy rose from 31.8% in 1968 to a peak of 74.6% in 2003. Since then, the GDP proportions gradually decreased, driven by the accelerated growth of production and exports from China and India, which saw their economies expand at a faster rate than Japan’s. Japan has seen multiple recessions since 2008 and over time has lost its competitive advantage with the US in various industries including electronics and car manufacturing.

Another contributing factor to their economic slowdown is demographics

The number one concern for any developed nation is its population growth. Japan’s population is the oldest in the world. By 2030, one in five people in Japan will be over 65. Not only that, there are not enough new workers to take on the jobs as more and more people retire. The percentage of working-age population is projected to fall from 66% in 2015 to 50% by 2050 –the US is expected to decline from 62% to 57%.

The US economy, while suffering through a recession since 2008 and slowing down in recovery, has been growing at a solid pace of 3% per year. The unemployment rate has fallen from 8% a decade ago to 4.1% today. That’s about half of Japan’s unemployment rate now (at 8%).

Will USD/JPY maintain this uptrend in Future?

The US Federal Reserve has raised interest rates five times since December 2015. It is projected to raise them again in June and July. The Fed funds rate, which essentially sets the short-term price of money, is expected to rise to 2.5% by the end of 2019. It is further expected to rise by 3.5% by mid-2020 and more than 5% by the end of 2021. The Fed’s interest rate hikes are a major factor in buoying the dollar against all other major currencies including the yen.

As mentioned earlier, Japan’s population and economic growth are key factors in determining whether USD/JPY will continue trending higher or not, as well as any other investment decisions one may make.

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