USD/JPY Forecast: From BoJ Pivots to Interventions with the Fed in Focus

USD/JPY Movement on Tuesday

The USD/JPY rallied 1.14% on Tuesday. Following a 0.10% gain on Monday, the USD/JPY ended the session at 150.845. The USD/JPY fell to a low of 148.972 before rising to a Tuesday session high of 150.961.

From Bank of Japan Pivots to Interventions

The Bank of Japan raised interest rates for the first time in 17 years, exiting negative rates on Tuesday. However, the markets considered the Tuesday policy decision a dovish pivot, impacting the Yen.

With the markets expecting the BoJ to sit at zero for the foreseeable future, wage hikes must translate into private consumption to enable the BoJ to lift rates higher. However, it may take time for households to ramp up spending, which could hinge on the macroeconomic environment.

The unlikeliness of another BoJ rate hike in 2024 could reignite threats of government intervention to bolster the Yen. On Wednesday, the USD/JPY hovered below the 151 handle.

There are no economic indicators from Japan for investors to consider on Wednesday. The Japanese markets are closed in celebration of the Vernal Equinox.

A lack of economic indicators will leave the USD/JPY in the hands of BoJ commentary and the Fed.

US Economic Calendar: FOMC Rate Decision, Projections, and Press Conference

On Wednesday, the US Federal Reserve will be in the spotlight. Economists expect the Fed to leave interest rates at 5.50%. Barring a surprise Fed policy move, the focus will be on the projections and press conference.

Recent US inflation figures for February reduced bets on an H1 2024 Fed rate cut. Hints of delaying rate cuts until H2 2024 could fuel a USD/JPY breakout and impact riskier assets.

According to the CME FedWatch Tool, the probability of a 25-basis point Fed rate cut fell from 62.6% (Mar 12) to 55.6% (Mar 19). Significantly, the chances of a 50-basis point Fed rate cut have fallen from 19.1% (Feb 16) to 3.6% (Mar 19).

Uncertainty about a June Fed rate hike exposes the USD/JPY to a choppy Wednesday session. The FOMC projections and press conference will be crucial.

In December, the FOMC projected interest rates will fall to 4.6% (Median) in 2024, signaling three quarter-point rate cuts. Delaying the timeline for a rate cut until H2 2024 could reduce bets on three quarter-point rate cuts to 4.6%.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on the FOMC projections and press conference. Upward revisions to inflation, GDP, and unemployment projections could tilt monetary policy divergence toward the US dollar. However, the potential for intervention threats may limit the upside for the USD/JPY.

USD/JPY Price Action

Daily Chart

The USD/JPY hovered well above the 50-day and 200-day EMAs, sending bullish price signals.

A USD/JPY return to the 151 handle would support a move to the 151.685 resistance level. A break above the 151.685 resistance level could give the bulls a run at the 152 handle.

The FOMC interest rate decision, projections, and press conference warrant investor attention, while potential intervention threats from the Japanese government also need consideration.

Conversely, a USD/JPY drop below the 150 handle would give the bears a run at the 50-day EMA and the 148.529 support level. Buying pressure could intensify at the 148.529 support level. The 50-day EMA is confluent with the support level.

The 14-day RSI at 63.41 indicates a USD/JPY move to the 151.685 resistance level before entering overbought territory.