Title: Japanese Yen Outlook: USD/JPY Faces Upside Risk Ahead of Fed and BoJ Meetings
Original Author: Matt Weller, CFA, CMT (forex.com)
Based on article from: https://www.forex.com/en-us/news-and-analysis/japanese-yen-outlook-usd-jpy-risks-tilt-higher-ahead-of-fed-and-boj/
The Japanese yen (JPY) continues to hover near multi-decade lows against the US dollar (USD), with the USD/JPY pair recently climbing above 157. This level is significant, not just because it marks a fresh multi-year high, but because it nudges the pair closer to critical thresholds that previously prompted official intervention by Japanese authorities.
The sustained depreciation of the yen since the start of 2024 remains a source of concern for policymakers in Tokyo, especially with monetary policy divergence between the US Federal Reserve and the Bank of Japan (BoJ) looking more likely to widen further. The upcoming central bank decisions from both institutions could set the direction of USD/JPY for weeks to come.
This article revisits the current technical and fundamental dynamics affecting the USD/JPY pair and considers potential scenarios depending on the results of the forthcoming Federal Reserve and Bank of Japan policy meetings.
Current USD/JPY Trends and Technical Landscape
USD/JPY remains firmly within a broad uptrend that began in early 2021. Several technical factors support the case for further gains in the short to medium term.
Key technical highlights:
– The weekly chart indicates a consistent upward trend, with USD/JPY approaching 160, a level not seen since 1990.
– Momentum remains strong, shown by rising moving averages and bullish MACD crossovers.
– After the pair touched 160 in late April and saw an immediate drop due to suspected yen-buying intervention, it has been steadily climbing again.
– If the USD/JPY pair breaches 160 definitively, it may confirm a bullish breakout, potentially targeting the 162 to 165 zone in the coming months.
– Support lies around the 154.50 to 155.00 level, which previously served as a base following suspected Japanese intervention earlier this year.
Despite overbought signals on some oscillators like RSI on shorter timeframes, there is no concrete evidence that the USD/JPY rally is over. Any pullbacks may just be short-lived corrections unless there is a significant catalyst to shift sentiment meaningfully.
Fundamental Drivers of Yen Weakness
Several macroeconomic factors continue to weigh heavily on the Japanese yen and underpin the rally in USD/JPY:
Interest Rate Differentials:
– The US 10-year Treasury yield continues to trade above 4.4%, while Japan’s government bond (JGB) yields remain below 1%.
– The interest rate spread between the two countries supports carry trade strategies, in which investors borrow cheaply in yen and invest in higher-yielding US assets.
– As long as this rate differential persists or grows, the yen is likely to weaken further.
Federal Reserve Policy Outlook:
– The Fed recently signaled a more patient approach to rate cuts, with Chair Jerome Powell emphasizing the need for further evidence that inflation is sustainably declining.
– With inflation still above the 2% target and the US economy showing resilience, market expectations for Fed rate cuts in 2024 have moderated.
– The likelihood of a rate hold or even another hike this year pushes USD higher and continues to make the dollar an attractive currency for investors.
Bank of Japan Policy Outlook:
– Even though the BoJ recently ended its eight-year negative interest rate policy by hiking rates by 10 basis points in March 2024, the yen showed virtually no strength. This reaction underscores the market’s perception that Japan’s policy stance remains extremely accommodative.
– The BoJ continues with its yield curve control (YCC), asset purchasing programs, and ultra-gradual tightening path.
– With inflation in Japan moderating and wage gains still uneven, the central bank
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