USD/JPY Forecast: Higher as Fed Hints at Rate Hikes Ahead of BOJ Meeting

Highlights

• USD/JPY rises on Federal Reserve’s rate hike indications.
• Bank of Japan likely to maintain dovish stance.
• Higher Treasury yields contribute to the strength of USD/JPY.

Overview

The USD/JPY is surging on Thursday following indications from the Federal Reserve of future rate hikes. While interest rates were held steady, the Fed hinted at a possible 50 basis point increase by the end of the year. The Bank of Japan (BOJ), on the other hand, is expected to maintain its ultra-dovish stance and yield curve control settings in its upcoming meeting. This pause in policy by the Fed is seen as a hawkish signal, suggesting that the US dollar could remain supported in the near term.

Fed’s July Rate Hike Expectations Rise

The Federal Reserve announced that it would assess the impact of its previous rate increases before the next meeting. The central bank began raising rates in March 2022 and aims to gather more information on the implications for monetary policy. Market estimates suggest a nearly 60% probability of a rate hike at the July meeting, according to the CME FedWatch Tool.

Higher Treasury Yields Supportive

Additionally, the Dollar/Yen is being boosted by higher Treasury yields. The move is widening the spread between US and Japanese government bonds, making the US dollar more attractive. While Treasury yields fluctuated after the Fed’s decision to hold off on a rate hike, the projection of two more increases later in the year influenced market sentiment. The 2-year Treasury yield saw a slight rise, reaching its highest level since March 20 before retracing, while the 10-year Treasury yield declined.

BOJ to Maintain Ultra-loose Monetary Policy

Looking ahead, the BOJ is expected to maintain its ultra-loose monetary policy and its outlook for a moderate economic recovery. Strong corporate and household spending is cushioning the impact of slowing overseas demand. The central bank may also indicate that inflation is exceeding its forecasts, potentially leading to upward revisions in its price projections during the quarterly review in July.

Possible BOJ Intervention

If the yen depreciates to the level of 145 per U.S. dollar, a majority of economists polled by Reuters believe that the Japanese government and the BOJ will take action to prevent further decline. Market participants are closely monitoring how both entities respond to currency movements. This is especially critical in light of the yen’s recent near six-month low.

Short-Term Forecast:  Bullish

In terms of a short-term forecast, the overall sentiment appears bullish. The signals from the Federal Reserve regarding potential rate hikes, coupled with the support from higher Treasury yields, suggest a favorable outlook for the USD/JPY pair in the near term. However, it’s important to consider ongoing market dynamics and geopolitical factors that could impact the currency pair’s performance.

Technical Analysis

Coming into Thursday’s trading session, market sentiment was skewed to the upside. Helped by the Fed’s hawkish tone, the USD/JPY is trading sharply higher. It is well above support at 137.859 (PIVOT) and edging closer to 142.216 (R1).

Following a test of 142.216, the USD/JPY 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

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