Title: Japanese Yen Outlook: USD/JPY Faces Upside Risks Ahead of Fed and BoJ Meetings
Original Author: Matt Weller, FOREX.com
Article rewritten for educational purposes
As global market participants look ahead to two pivotal central bank meetings, the outlook for the Japanese yen (JPY) remains increasingly fragile. The US dollar (USD) has appreciated sharply in recent months, including against the yen, and short-term momentum appears to favor further upside in the USD/JPY currency pair. Against this backdrop, traders and investors will be closely monitoring the upcoming monetary policy decisions from the US Federal Reserve (Fed) and the Bank of Japan (BoJ), both of which have the potential to reshape the trajectory of this major currency pair.
Economic Backdrop: Diverging Fundamentals Support the Dollar
One of the primary drivers of the USD/JPY exchange rate over the past year has been the stark divergence in monetary policy between the Federal Reserve and the Bank of Japan. While the Fed has spent the last two years aggressively raising interest rates to combat persistent inflation, the BoJ has maintained an ultra-loose monetary policy stance, leaving interest rates near zero and continuing to engage in yield curve control (YCC) operations.
Key points regarding monetary policy divergence:
– The Fed’s benchmark interest rate currently sits in the range of 5.25% to 5.50% after a series of hikes beginning in March 2022.
– In contrast, the BoJ has only recently taken tentative steps away from negative interest rates, but remains among the most dovish of major central banks.
– The result is a stark interest rate differential between US Treasuries and Japanese government bonds, which incentivizes carry trades by borrowing in JPY to invest in higher-yielding USD assets.
This wide gap between rates continues to provide significant support for the US dollar and is a leading factor in the bullish bias for USD/JPY in the current environment.
Recent Performance and Technical Setup
The USD/JPY pair has been trending higher throughout 2024, and in recent weeks, it has approached critical resistance levels that could determine the next stage of its move.
– Year-to-date, the yen has depreciated by over 10% against the US dollar, making it one of the worst-performing G10 currencies.
– At the time of writing, USD/JPY has tested the psychological 160.00 level, a notable resistance area that coincided with both technical levels and government intervention concerns in previous cycles.
– Last year in October, Japanese authorities intervened in the currency markets when USD/JPY approached these levels, attempting to stem yen depreciation.
The sustainability of this rally will depend heavily on upcoming macroeconomic and policy signals, particularly from the Fed and BoJ.
Federal Reserve Outlook: Hawkish Signals Persist
The US Federal Reserve will meet in the coming days and release both a policy statement and updated economic projections. Despite markets pricing in potential rate cuts later in the year, recent Fed commentary has struck a relatively hawkish tone, suggesting that policymakers are cautious about declaring victory over inflation too early.
Supporting hawkish sentiment:
– US core inflation remains sticky, especially in the services sector, raising concerns that underlying price pressures are more persistent than expected.
– Labor market conditions, while cooling modestly, remain tight and continue to support consumer spending.
– The Fed’s preferred inflation metric, the Core PCE Price Index, has remained above the 2% target, reinforcing arguments for holding rates higher for longer.
If the Fed’s statement emphasizes these upside risks—perhaps via upward revisions in the dot plot or slower-than-anticipated rate cuts—then USD/JPY may find renewed strength and continue pushing toward or beyond recent highs.
Bank of Japan: Cautious Normalization Fails to Support Yen
While the Fed navigates how to manage restrictive policy, the Bank of Japan faces a different problem. Inflation in Japan has been rising gradually, and there are increasing calls for the BoJ to normalize its stance. However
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