3 Elliott Waves reasons why USD/JPY is heading much higher

One of the most exciting markets in 2022 was the USD/JPY. The exchange rate made a significant technical breakout early in the year, rallying ever since.

From a fundamental perspective, the bullish breakout is justified by the interest rate differential between the two central banks – the Federal Reserve of the United States and the Bank of Japan. Also, the overall monetary policy in the two countries diverges.

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Besides fundamentals, technical factors also justify the breakout. Moreover, they point to ongoing strength, at least judging by the Elliott Waves principles.

Many traders find the current levels unjustifiable. After all, such a rally must be followed by a steep decline.

But the Elliott Waves theory signals the opposite. So not only that the rally is not over, but what follows might be even more bullish than the previous move.

So here are three Elliott Waves reasons to stay long USD/JPY:

• 5-wave structure completed with the first attempt at 140
• b-wave’s retracement suggests a zigzag pattern
• c-wave of a zigzag is an impulsive wave

1^st wave extension impulsive move completed

Since March, the USD/JPY rallied close to 2,500 pips. This is huge in terms of FX terms.

A rising wedge pattern is visible on the daily chart, suggesting an imminent reversal once the market failed at 140. Indeed, the market broke lower once the lower edge of the pattern was broken.

But a rising wedge is also present in an impulsive structure. Hence, one can count a five-wave structure from the breakout point, where the first wave is the longest or the extended one. Therefore, at the end of the a-wave (in blue), the question is – what is the bigger degree structure?

B-wave suggests a zigzag

A zigzag is a corrective pattern. As such, traders use letters to count it – a-b-c.

But of all corrective patterns, a zigzag is the only one resembling impulsive activity. The reason for that comes from the fact that a zigzag is formed out of two separate impulsive waves – the a-wave and the c-wave.

They are connected by a small b-wave, that typically retraces between 23.6% and 38.2% of the a-wave. Just like the retracement from above 139, suggesting a c-wave follows.

C-wave of a zigzag is an impulsive move

The c-wave of a zigzag is a five-wave structure or an impulsive move. Interestingly, it should exceed 61.8% of the a-wave in price, and be equal with it in time.

To sum up, the Elliott Waves theory suggests that the USD/JPY should rally minimum 1,600 pips from the end of the b-wave, and peak in early 2023. In short, Elliott points to a move well above 150 in about six months or so.