USD/JPY Forecast: Continuing to Trend Higher Following Dovish BOJ Policy Decision

USD/JPY Highlights

• BOJ maintains dovish policy
• Low trading activity due to public holidays in Asia
• Fed expected to raise interest rates

USD/JPY Overview

On Monday, the USD/JPY pair is higher, continuing its upward trend after the Bank of Japan (BOJ) decided to maintain its current monetary policy. As a result, the Japanese yen decreased by 1.7%, which was the largest daily drop since early February.

At 09:22 GMT, the USD/JPY is trading $136.742, up $0.337 or +0.25%. On Friday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.35, down $1.20 or -1.73%.

However, currency trading was quiet on Monday due to public holidays in most parts of Asia, resulting in low trading activity. Traders were preparing for a busy week of central bank meetings, which would provide updates on future interest rate increases across various regions. Foreign exchange market activity was limited due to the Labor Day holidays in Singapore, Hong Kong, and mainland China. As a result, Japan, Australia, and New Zealand were the only financial centers open in Asia.

China Manufacturing Decrease Weighs

Risk appetite was affected on Monday by two main factors. Firstly, there was an unexpected decrease in China’s manufacturing activity in April. Secondly, there was news over the weekend that major US banks such as JPMorgan Chase & Co were competing to acquire First Republic Bank, which also contributed to the cautious sentiment among traders.

Fed Expected to Raise Rates

Looking ahead to the upcoming week, it’s anticipated that the Federal Reserve will raise interest rates by 0.25% during their meeting on Wednesday. Investors are closely monitoring the Fed’s announcement for any indications on how long rates will stay high, as well as when the Fed may begin cutting rates. This is especially important given the GDP figures from last week, which showed lower-than-expected economic growth in the first quarter. Additionally, the personal consumption expenditure index, which is one of the Federal Reserve’s preferred measures of inflation, increased by 4.2% in the previous quarter.

Goldman Sachs: Fed to Pause

According to Goldman Sachs, the Federal Reserve is likely to take a break and pause in June, after increasing interest rates by 0.25% during the meeting on Wednesday. Investors will be watching for any updates or changes to the Fed’s forward guidance during their statement. Following May, it’s predicted that the Federal Open Market Committee (FOMC) will keep interest rates unchanged for the remainder of the year. However, there are several possible outcomes, depending on how significantly the banking system stress affects the economy.

US Treasury Yields Inch Up

On Monday, US Treasury yields slightly increased in anticipation of the upcoming meeting of the Federal Reserve’s Federal Open Market Committee. Specifically, the yield on the 10-year Treasury was at around 3.467% at 8:40 GMT, which was up by 1 basis point. Meanwhile, the 2-year Treasury yield remained unchanged at 4.066%. When Treasury yields are higher, the gap between US Government bonds and Japanese Government bonds widens. This causes the US Dollar to become more attractive than the Japanese Yen.

US Economic Reports Due Monday

Additionally, on Monday, several economic reports are due, including the ISM manufacturing data, construction spending, and S&P Global manufacturing PMI. Later in the week, the nonfarm payrolls report for April is also expected to be released on Friday.

Technical Analysis

Looking at the USD/JPY from a daily technical perspective, the Forex pair is currently trading above its daily PIVOT at $134.518, indicating strength. However, it has yet to surpass resistance (R1) at $138.452, which is the next major target. Both the short-term and long-term trends are in sync and moving higher.

A sustained upward move above the PIVOT at $134.518 indicates the presence of buyers. Conversely, a sustained move below the PIVOT would weaken the USD/JPY, making support (S1) at $132.471 the next target.

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