USD/JPY Forecast – Interest Rate Differential Keeps Dip Buyers Active

The US dollar initially was a bit weak on Wednesday but has since bounced a bit as we are waiting for the interest rate decision coming out of the Federal Reserve.

USD/JPY

The US dollar fell early against the Japanese Yen during the trading session on Wednesday as the market continues to see a lot of noisy behavior. Ultimately, this is a market that I think a lot of people will look at through the prism of the interest rate differential, and that of course has been paying traders quite nicely.

Now the question, of course, is whether or not the Federal Reserve interest rate decision later in the day is going to be a headline event or not. There's about a 40% chance of an interest rate hike according to the FedWatch tool, and that means that a significant number of traders, one way or the other, are going to be surprised. That should make for a nice volatile move.

Interest Rate Differential Continues to Drive Long-Term Trend

Ultimately, the interest rate differential between the United States dollar and the Japanese Yen remains wide, and that allows traders to take advantage of getting paid at the end of every day. In fact, that's what I've done for the last several months. I've been a buyer of this pair, and I've added every time it dipped.

I don't have any concerns about shorting, quite frankly. This interest rate differential will continue to pay traders over the longer term, even if the Federal Reserve does not hike and the Bank of Japan raises. Yes, that could cause a little bit of short-term volatility, but at the end of the day, the trend is well entrenched. We are trading at levels not seen since the 1980s, and there's a reason for that.

I look at the 50-day EMA and the 162-yen level as support at the moment. I do not have a target per se but based on the rounding bottom that just broke out of a 40-year pattern, the measured move is 224 yen. That would take some time, obviously.