USD/JPY Forecast: Fed, Bank of Japan Divergence Driving Bullish Tone

Highlights

• Central banks’ policies shape global markets.
• USD/JPY influenced by US dollar strength and yen weakness.
• Market awaits Fed’s confirmation on interest rate hikes.

Overview

The Federal Reserve (Fed) and the Bank of Japan (BOJ) are two influential central banks that have a significant impact on their respective economies. Their monetary policies and decisions on interest rates play a crucial role in shaping global markets.

Central Banks’ Monetary Policy Evaluation

Traders and investors are carefully evaluating the monetary policies of these central banks following their recent meetings. Last week, the Federal Reserve decided to keep interest rates unchanged but signaled its intention to implement future hikes. On the other hand, the Bank of Japan maintained its ultra-easy policy, with short-term rates at -0.1% and a 0% cap on the 10-year bond yield.

Hawkish Fed Bullishness

The movement of the USD/JPY is reflecting several key factors. Firstly, the US dollar has witnessed significant gains due to market expectations of a hawkish outlook for US interest rates. This positive sentiment is supporting the Forex pair. However, the yen has been weakening, reaching near seven-month lows against the dollar and a 15-year low against the euro.

Market Pricing in Fed Rate Hike

In the short term, the market sentiment is bullish towards US interest rates. According to the CME FedWatch tool, there is a 74% probability of the Federal Reserve implementing a 25 basis point hike next month. However, investors are still awaiting confirmation that the Fed will follow through with the two additional hikes initially anticipated for this year.

Focus Shifts to Powell Testimony

The upcoming testimony of Fed Chair Jerome Powell to Congress holds significant importance for investors. Powell’s statements will shape market expectations and sentiment moving forward. Additionally, the Bank of Japan’s stance on interest rates and commitment to maintaining loose monetary policy will continue to impact the USD/JPY Forex pair.

Fed, BOJ Divergence Supportive

Currently, the USD/JPY Forex pair is going through a consolidation phase after its recent strong gains. The hawkish outlook for US interest rates is providing support to the pair, while the Bank of Japan’s ultra-easy policy is weighing on the yen.

Technical Analysis

The USD/JPY is trading higher, while edging closer to 142.216 (R1).

The first test of 142.216 could draw the attention of sellers and profit-takers. However, overtaking this level will be a sign of strength. If it creates enough upside momentum then look for a surge toward 145.292 (R2).  This level is in the area that could lead to another intervention by the Japanese government or the Bank of Japan.

Resistance & Support Levels