USD/JPY Drops Following Expected Fed Rate Hike and Outlook on Rates; Bank Failures Prompting Policy Changes

Key Takeaways

• Dollar/Yen drops following U.S. Federal Reserve’s rate hike and indication of only one more this year
• Fed hints at possible end to rate hikes amid recent bank failures
• Fed Chair Jerome Powell assures public of banking system stability and resilience, Wells Fargo analysts predict weaker dollar in coming weeks and days.

Overview

On Wednesday, the Dollar/Yen dropped following the U.S. Federal Reserve’s expected quarter-point increase in its key rate, coupled with an indication of only one more rate hike this year.

At 20:27 GMT, the USD/JPY is trading 131.269, down 1.185 or -0.89%. The Invesco CurrencyShares Japanese Yen Trust settled at $71.05, up $0.71 or +1.01%.

Fed Suggests Possible End to Interest Rate Hikes Amid Bank Failures

The Fed has projected at least one more interest rate increase of 25 basis points by the end of 2023, but it suggested that this could be the initial stopping point for rate hikes.

In light of the recent failures of Silicon Valley Bank and Signature Bank, the Fed’s latest policy statement has removed the language indicating that “ongoing increases” in rates would likely be appropriate, which had been present in all policy statements since the rate-hiking cycle began on March 16, 2022.

Karl Schamotta, the chief market strategist at Corpay, believes that the Fed’s hike and relatively dovish outlook on rates over the next year has given the markets what they were anticipating.

Powell Assures Stability of Banking System Amid Recent Failures

Investors were also closely watching Fed Chair Jerome Powell’s comments regarding the recent global banking crisis.

Powell assured the public that the banking system is stable and resilient, and that the Fed is prepared to utilize all available resources to maintain its safety and soundness. In the wake of several smaller U.S. lenders’ failures and the collapse of Credit Suisse, the Fed, along with other major central banks, has taken steps to ease the financial system.

Wells Fargo analysts stated that the Fed’s “dovish hike” should result in a weaker dollar in the coming weeks and days, provided that bank liquidity issues do not arise.

Daily USD/JPY Technical Analysis

The main trend is down according to the daily swing chart. A trade through 130.544 will signal a resumption of the downtrend. The main trend will change to up on a move through 137.911.

The minor trend is also down. A trade through 133.002 will change the minor trend to up.

Currently, the USD/JPY is straddling a Fibonacci level at 131.339. Minor pivot resistance lies closest at 131.773, followed by a long-term retracement zone at 132.700 to 133.992.

Daily USD/JPY Technical Forecast

Trader reaction to 131.773 and 131.339 is likely to determine the direction of the USD/JPY into the close on Wednesday.

Look for the bearish tone to continue on a sustained move under 131.339 with near-term targets 130.544, 129.814 and 127.227.

A bullish tone could develop on a sustained move over 131.883. This could trigger a surge into 132.700, followed by 133.002.

For a look at all of today’s economic events, check out our economic calendar.