The dollar/yen hit 5-year highs today, reaching 116.00. Traders woke up after the pre-New Year's absence of activity and then dragged the pair upwards. In two days they made an almost 150 pips rally, breaking through many boundaries. In particular, the pair pierced resistance at 116.00 without any problems, due to the rapid upward momentum. Bulls retested a 5-year high today: the last time the price reached this area was in early January 2017.
Such a price movement is explained not only by the strengthening of the US dollar. Although the main driving force is the greenback. However, the yen is not standing aside, which is depreciating in the markets today. The fluctuations in such pairs as GBP/JPY or EUR/JPY prove this. The Japanese currency got into a wave of sell-offs because of the weakening of anti-risk sentiment in the market. By the way, the franc is depreciating for the same reason.
Safe-haven assets are no longer in high demand amid the easing of the situation concerning Omicron. The new strain is not being contained (it is actively spreading across the planet), traders - especially dollar bulls - are now quite calm about this fact. The new variant of Covid turned out to be not so lethal compared to the Delta variant, which just a few months ago was dominating. According to the latest data, the Omicron strain has a 75% lower mortality rate than other strains. Omicron is several times more contagious, but it affects the lungs much less and tends to cause a less severe course of the disease. These are the conclusions reached by many scientists, particularly those of the World Health Organization. A similar verdict was voiced by other specialists from the US, the UK, and Japan. According to these scientists, the coronavirus will eventually become endemic, like the flu. COVID will cause colds in some people and more serious illnesses in others, depending on general health state, vaccination, and previous infections. Moreover, a person's immune system will become better at recognizing and resisting the coronavirus over time.
In other words, the scientific community is very optimistic about prospects. According to many experts, Omicron will contribute to the transition of the pandemic to the endemic phase. Amid such background, the US authorities once again rejected the introduction of a new lockdown. Instead of this measure, they decided to promote vaccines. This fact also provides significant support to the USD/JPY pair.
Amid the weakening of the yen, the dollar continues to gain momentum, following treasury yields. Traders ignored the latest data on inflation, which were released in the US at the end of December. The core PCE index jumped to 4.7% in November yearly. This is the strongest growth rate since 1989. At the same time, the October result was revised upwards (to 4.2% from 4.1%). This release was a logical complement to another inflation report, which reflected a record increase in the consumer price index. The CPI is similarly at yearly highs. According to the latest data released, the CPI accelerated to 6.8% in November yearly. This is the highest reading of the indicator in the last 39 years.
The economic reports were published after the December meeting of the Fed. Therefore, members of the US regulator may significantly tighten their rhetoric at the January meeting. Primarily, in the context of the pace of interest rate hikes this year. If the dollar bulls are not let down by the NonFarms on Friday, the fundamental data is likely to play in favor of the greenback. That's why the other major currency pairs are behaving more restrained. However, traders have no doubts about the USD/JPY pair as the yen may reverse the situation in its favor only in case of a sudden strengthening of anti-risk market sentiment. All other fundamental factors are against the Japanese currency. In particular, according to some analysts, the Bank of Japan is likely to remain one of the most dovish central banks next year.
From the technical point of view, the situation is as follows. On all higher time frames (except the weekly chart) the pair is on the upper line of the Bollinger Bands indicator, above all lines of the Ichimoku indicator, which has formed a strong bullish signal "Line Parade". This indicates a clear uptrend. The bullish momentum is so strong that it is too early to speak about a price correction: only if Friday's data of the US labor market growth is much worse than it was expected, the pair's bears may count on a temporary pullback. Otherwise, the uptrend is likely to persist. The next target for bulls is at 116.60, which is the upper line of the Bollinger Bands on the weekly chart. The main target for them is a little bit higher at 117.00. The strong rally has not finished yet, so traders may consider opening long positions while the pair is performing pullbacks.
