Title: USD/JPY Forecast: Bullish Momentum Builds Ahead of CPI and FOMC Announcements
Original Author: Matt Weller, CMT, CFA (Courtesy of Forex.com)
Link to Original Article: [Forex.com](https://www.forex.com/en-us/news-and-analysis/usd-jpy-outlook-bullish-momentum-builds-ahead-of-cpi-and-fomc-commentary/)
The USD/JPY currency pair has continued to attract attention among traders and analysts, stemming from a sustained bullish trend bolstered by market fundamentals and investor sentiment. As the pair hovers near key resistance levels, attention is sharply focused on two pivotal events: the release of the U.S. Consumer Price Index (CPI) and the Federal Reserve’s upcoming interest rate decision and commentary at the Federal Open Market Committee (FOMC) meeting.
Recent Performance of USD/JPY
Over the past year, the USD/JPY pair has displayed significant strength, especially in the face of diverging central bank policies between the United States and Japan. With the Federal Reserve aggressively raising interest rates to combat persistent inflation and the Bank of Japan (BoJ) maintaining an ultra-loose monetary policy, the interest rate differential between the U.S. dollar and the Japanese yen has widened considerably. This divergence continues to fuel upward momentum in the USD/JPY pair.
Key contributing factors to the pair’s bullish behavior include:
– Rising U.S. Treasury yields, which increase the appeal of dollar-denominated assets
– Persistent policy divergence between the Fed and BoJ
– Market expectations of future interest rate moves favoring the dollar
– Safe-haven demand for the dollar during times of uncertainty, despite the yen’s traditional safe-haven status
With the pair now approaching the psychological 157.00-158.00 level, traders are closely watching whether fresh macroeconomic data will propel the currency pair to new highs or introduce a period of consolidation.
Fundamental Drivers of USD/JPY
1. Diverging Central Bank Policies
– The Federal Reserve has hiked interest rates significantly in its efforts to bring inflation under control. Despite inflation showing signs of moderating, the Fed remains cautious, signaling that further rate hikes are possible should inflationary pressures re-emerge.
– On the other hand, the Bank of Japan has maintained its yield curve control policy, targeting low yields on Japanese Government Bonds (JGBs) and keeping short-term policy rates below zero. The BoJ shows little urgency in tightening policy, citing concerns about wage growth and sustainable inflation.
This divergence is a critical catalyst for the dollar’s strength against the yen. As long as this gap persists, the yield advantage will continue to favor holding dollars over yen.
2. U.S. Inflation Data (CPI)
The next major data point for traders is the U.S. Consumer Price Index (CPI) report. Given the Fed’s dual mandate of price stability and maximum employment, inflation remains a key metric. The upcoming CPI report is anticipated to reflect continued cooling of price pressures.
Analyst expectations for CPI include:
– Headline CPI to increase around 0.1% month-over-month
– Core CPI (which excludes food and energy) to rise approximately 0.3% month-over-month
– On a year-over-year basis, core CPI may decelerate toward 3.4%
Any significant deviation from expectations in this report can prompt major moves in USD/JPY. If inflation comes in hotter than expected, it may revive expectations for additional rate hikes, bolstering the dollar further. Conversely, a softer-than-expected CPI could undermine the bullish trend, at least in the short term.
3. FOMC Meeting and Dot Plot
The markets are pricing in a high probability that the Fed will leave interest rates unchanged at its June FOMC meeting. However, more attention will be given to the accompanying Statement, Summary of Economic Projections (SEP), and the so-called “dot plot” that
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