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USD/JPY Expected to Resume Rally on Back of Aggressive Fed Policy

By:
James Hyerczyk
Updated: May 2, 2022, 04:37 UTC

Essentially, the next major move in the USD/JPY will be determined by the strength of the hawkish tone coming out of the Federal Reserve meeting.

USD/JPY

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The Dollar/Yen hit a 20-year high last week, with dovish Bank of Japan policy pressuring the Japanese currency. Bolstering the greenback were concerns about the global economy and a hawkish Federal Reserve.

The Yen hit its weakest level since April 2002. The dollar gained 6.41% against the Japanese currency in April, the best month since November 2016.

Last week, the USD/JPY settled at 129.859, up 1.296 or +1.01%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) finished at $72.17, down $0.70 or -0.96%.

BOJ Bolsters Commitment to Ultra-Easy Policy

The Bank of Japan (BOJ) last Thursday strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds daily to defend its yield target. The move was responsibel for triggering a fresh sell-off in the Yen and sending government bonds rallying, according to Reuters.

The BOJ maintained its ultra-loose monetary policy and a pledge to keep interest rates at “present or lower levels.” This helped reinforce its resolve to support a fragile economy even as sharp rises in raw material costs push up inflation,

It also said it would buy unlimited amounts of 10-year government bonds to defend an implicit 0.25% cap around its zero yield target every market day, instead of an ad-hoc basis, Reuters reported.

Kuroda Stands by Commitment to Lower Rates

“We want to prevent Japan’s long-term interest rates from rising in line with overseas bond yield increases,” BOJ Governor Haruhiko Kuroda told a news conference after the policy decision.

Kuroda said there was no change to his view that a weak Yen benefits Japan’s economy, a sign further falls in the currency likely won’t prompt the BOJ to tweak its ultra-easy policy. But warned that excess market volatility could hurt the economy by making it difficult for firms to set business plans.

Weekly Forecast

The USD/JPY could resume its rally this week as the divergence in monetary policies between the Fed and the BOJ will widen after the Fed raises its benchmark interest rate 50-basis points on May 4.

The key to sustaining the uptrend will be what the Fed says about future rate hikes. At this time, the markets are pricing in additional 50-basis point rate hikes in June and July. A series of 25-basis point at every meeting until the end of the year could follow.

Investors have ramped up expectations of how aggressively the central bank may tighten monetary policy. However, many are concerned the Fed will not be able to keep the economy afloat as it battles the worst inflation in nearly four decades.

Essentially, the next major move in the USD/JPY will be determined by the strength of the hawkish tone coming out of the meeting.

But there could be a problem with excessive volatility, which may trigger a break in the Dollar/Yen. An official of Japan’s finance ministry, which decides whether to conduct currency intervention, told reporters Tokyo will take “appropriate” action as needed and warned that recent sharp Yen moves were “extremely worrying”.

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

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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