Article rewritten by request, based on the original piece authored by Matt Weller, CFA, CMT, from FOREX.com. The original article can be viewed at this link.
JPY Outlook: USD/JPY, EUR/JPY, AUD/JPY Trends Ahead of Key Central Bank Meetings
In the lead-up to two of the most significant central bank policy events of the month — the Federal Reserve and the Bank of Japan (BoJ) meetings — the Japanese yen has become a key focus in the currency markets. Ongoing yen weakness amid shifting global monetary policy expectations is impacting major currency pairs like USD/JPY, EUR/JPY, and AUD/JPY.
As traders prepare for these events, the dynamics of the Japanese yen against its peers present opportunities and risks that deserve closer examination. Understanding the implications of both the Federal Reserve’s and the Bank of Japan’s policy moves will be crucial for anticipating currency movements through the rest of the month.
Japanese Yen Under Pressure
The Japanese yen has continued to weaken throughout 2024, making it one of the worst-performing currencies among the G10 economies. This ongoing depreciation reflects the divergence between the BoJ’s ultra-loose monetary policy and the tightening stances of other major central banks.
Contributing factors to yen weakness:
– The BoJ maintains negative interest rates and continued yield curve control, despite rising price pressures.
– Japan’s inflation continues to hover around the 2% mark, but real wage growth and consumer demand remain sluggish.
– Meanwhile, central banks such as the U.S. Federal Reserve and the European Central Bank have either implemented or signaled continued rate hikes in response to inflation exceeding targets.
This divergence has led to reduced carry appeal of the yen and has prompted capital outflows in search of higher yields abroad, placing additional downward pressure on JPY.
Upcoming Central Bank Decisions
Traders are watching this week’s Federal Open Market Committee (FOMC) decision and next week’s Bank of Japan policy announcement as potential catalysts for the yen.
Federal Reserve Outlook
The FOMC is widely expected to hold interest rates steady at its next meeting. However, updates to the “dot plot” economic projections and the post-meeting press conference will be scrutinized for clues about future rate hikes.
Key factors markets will focus on include:
– Whether the Fed signals a willingness to keep rates elevated for longer.
– Forecast revisions to inflation and GDP growth for 2024 and beyond.
– Any hints toward balancing inflation risks against slowing economic momentum.
Recent U.S. data have shown signs of economic moderation, but inflation resilience could still justify a hawkish tone from Fed Chair Jerome Powell.
Bank of Japan Outlook
The Bank of Japan, by contrast, remains highly cautious about normalizing monetary policy. At its last meeting, the BoJ highlighted its concerns regarding wage growth and domestic demand.
Key details to consider in the upcoming BoJ meeting:
– Whether Governor Kazuo Ueda provides a clearer timeline for exiting negative rates.
– Revisions to inflation and wage growth forecasts which may signal future tightening.
– Any hints about adjustments to the yield curve control (YCC) program, which would mark a shift toward policy normalization.
Currently, markets are pricing in minimal chances of a BoJ hike in the near term, suggesting continued pressure on the yen unless market expectations shift meaningfully.
USD/JPY Technical and Fundamental Outlook
USD/JPY has remained in an uptrend through the first half of 2024, peaking near the 145 level, consistent with a broader narrative of dollar strength and yen weakness. Traders are paying close attention to this pair, given its correlation to interest rate differentials.
Factors supporting USD/JPY strength:
– Widened yield spreads between U.S. Treasuries and Japanese government bonds due to diverging policies.
– Robust U.S. employment and retail numbers suggest continued economic resilience.
– Current Fed policy remains more hawkish than the BoJ’s, favoring further upside in the pair.
Technical outlook:
– Resistance
Explore this further here: USD/JPY trading.