USD/JPY: forecast after a 200-pip jump in the last 2 weeks

One of the major short squeezes in the forex occurred over the past two weeks, as the USD/JPY pair  moved from 115 to over 121 on a vertical line.

Japanese yen pairs have outperformed over the past two weeks due to a massive depreciation of the yen. For example, the USD/JPY, the main exchange rate for the JPY, has dropped over 600 pips over the period, with no pullback.

Looking at the charts, the JPY underperformed during the virus situation. As such, it appears that the current bullish breakout is a short compression as the market extends its gains.

So what led to the bullish breakout in USD/JPY?

The ascending triangle broke higher
An ascending triangle is a bullish pattern that forms during bullish trends. The USD/JPY has formed an ascending triangle over the past few months, and a bullish breakout has occurred above 116.

After the bullish breakout a fortnight ago, the market literally rallied without any pullback. In addition, all long-lasting correlations in the market have been broken.

For example, the USD/JPY rose while US equities recovered from their lows. This is a positive correlation, which is typical of the currency and equity markets.

But AUD/USD and NZD/USD also rose, in an unusual move for such a time. Moreover, the Japanese yen is a safe haven currency, or at least it was. This means that in times of uncertainty such as the Russia-Ukraine conflict, safe haven currencies should be in demand. Yet investors sold and did not buy the JPY.

The Bank of Japan is the only major central bank to maintain an accommodative bias
One of the reasons for the JPY's decline is the position of the Bank of Japan. It remains the only major central bank to take an accommodative stance, so its policies are weighing on the currency.

What's next for the USD/JPY?

The market remains bullish from a technical perspective while breaking above the 116 level. Therefore, investors would likely buy any pullback, and unless the central bank signals a change in policy, the JPY will remain on offer.