Investor and trading community is aware that the Japanese Yen is one of the currencies which has depreciated sharply against the US Dollar since the start of 2021. Before going deeper, it is important to look at the stance of the Central bank of Japan and the US FED to get more clues.
As we know, majority of Countries like US, Europe, India, etc. are battling with higher inflation. To keep the inflation under control, the Central banks have started to increase the interest rates. Thus, there is a reversal in the interest rate cycles.
However, the story of Japan is different because it has gone through severe deflation for many decades. Since 1989 Japan’s Inflation rate has failed to surpass above 4.5%. Due to this, the Japanese Central banks have continued with an easy monetary policy although globally the rate cycle had started to reverse. The Japanese economy is an ‘export driven’ economy. A weaker Yen is good for the economy as it results in higher exports and eventually higher growth. From a fundamental point of view, tight major world Economic policies and loose monetary policy by the Japanese central bank is clearly indicating the tougher time ahead for Yen and it will continue to lead weakness against greenback.
Cross-Currency pair have witnessed sharp trends since the beginning of 2021. Whether we look at EURUSD or GBPUSD or USDJPY, the trend is sharp for each currency pair as the greenback (US Dollar) has been in a strong uptrend. We have taken USDJPY to show the probable future path applying Elliott wave theory as well as basic Technical analysis.
USDJPY Monthly chart:
USDJPY Monthly Chart ( Inverse Head and Shoulders Pattern):
Elliott wave structure:
Identifying Elliott wave patterns: We have shown USDJPY Monthly chart. In this we can see, in the year of 1976 this currency pair was trading near $310 levels and from thereon it fell towards the lows of $75 by the end of 2011. This entire fall exhibited the impulsive structure wherein wave 3 (blue color) from 1981 to 1996 was extended and it was about 2.618 times of blue wave 1. Blue wave 2 and blue wave 4 followed the rule of alternation as wave 2 formed Zigzag correction pattern whereas wave 4 formed a Triangle pattern. In the final leg of the fall which is blue wave 5, there was an Ending Diagonal Pattern post which the entire trend reversed on the upside. This is classical textbook example from Elliott wave perspective.
Forecasting the path: Now, the rise witnessed from $75 to $125 constituted a clear impulse structure. Post that for around 6 years (2015 to 2021) prices moved in a sideways phase and completed green wave ii. As of now, USDJPY is in most impulse and sharpest wave which is 3rd wave and that will be the deeper retracement of entire downtrend which started from 310 to 75 in the form of wave A (mostly in the form of Zigzag pattern). As after impulse of 1-2-3-4-5 we see the correction in the form of wave A-B-C.
Moreover, prices have also breached 2-4 downward moving black trendline along with red and yellow trendline which further confirms our view that next phase of bullish trend has started in the form of Zigzag. Going ahead we might see prices testing 180-186 zone where 1.618 times of green wave i is placed.
Fibonacci Confluence: The future path of the same is shown by green wave iv in form of retracement and post that green wave v which is likely to test 2.618 times of wave i. The 2.618 times of wave i also coincides with Golden ratio I.e 61.8% of the prior fall from $310 to $75 level which is placed near $215-220 levels.
Adding more confluence: The above is one of the example of how we can forecast the market based on Elliott wave principal. For adding more objectivity, we have shown second monthly chart which shows formation of an ‘Inverse Head and Shoulders Pattern’. This pattern forms during the completion of downtrend and post which entire trend reverses on upside.
As of now, prices have broken the neckline of the pattern which suggest there is high possibility of continuation of up move which favors our green wave iii possibility. On a conservative basis, we are likely to test $140-145 levels where target as per right shoulders is placed. At the same time, pattern target is placed at $170-175 levels which has been derived as per length of the head.
Conclusion: We have forecasted the path ahead for USDJPY with the help of Elliott wave theory and basic Technical Analysis. As discussed above our stand is bullish for this currency pair with $140-145 as conservative target followed by $170-175 where target as per length of the head is placed. Going by the Fibonacci extension 180-186 is the zone where 1.618 times of wave i is placed.
One should always remember that there are n number of possibilities and we have arrived at a highly probable scenario to unfold from hereon. The above bullish path will remain valid as long as prices stays above $113-111 zone where 61.8% retracement of the recent rise from $102 to 131 level is placed.