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USD/JPY Forecast: Higher as U.S. Treasury Yields Recover, Fed Meeting Looms

By:
James Hyerczyk
Updated: Jun 9, 2023, 09:32 GMT+00:00

Traders await next week's Federal Reserve and Bank of Japan meetings, seeking indications of interest rate direction and its effect on USD/JPY.

USD/JPY

In this article:

Highlights

  • USD/JPY strengthens on U.S. Treasury yield recovery.
  • Traders speculate on Fed’s interest rate decision during central bank meetings.
  • Mixed signals from Fed officials and economic data create uncertainty.

Overview

The Dollar/Yen is up on Friday, supported by a modest recovery in U.S. Treasury yields. On Thursday, the Forex pair had witnessed a sharp decline following a surge in U.S. weekly jobless claims, which fueled hopes among traders that the Federal Reserve interest rates might reach their peak soon. As attention now shifts to the upcoming week filled with central bank meetings, investors eagerly await fresh interest rate decisions.

At 09:14 GMT, the USD/JPY is trading 139.620, up .724 or +0.52%.

Traders Eyeing Fed’s Rate Outlook

Looking ahead to the Federal Reserve monetary policy meeting scheduled for next week, market participants are analyzing the potential future of interest rates. With the Fed’s meeting set for June 13 and 14, uncertainty has arisen regarding whether the central bank will continue its rate-hiking campaign or opt for a pause. This hesitancy stems from mixed signals from both Fed officials and economic data in recent weeks.

Bearish Reaction to Jump in Jobless Claims

Recent data revealed that the number of Americans filing new claims for unemployment benefits surged to the highest level in over 1-1/2 years. However, it’s important to note that the data encompassed the Memorial Day holiday, which may have introduced some volatility and could have affected the accuracy of the figures. Nevertheless, this development was enough to push the USD/JPY to its lowest point in five sessions, as investors interpreted it as a sign of a slowing U.S. labor market.

Our analysis indicates that the United States, along with many other economies, may experience a shallow recession this year. Consequently, this could be reflected in payroll numbers and jobless claims, further impacting the overall economic outlook.

Fed, BOJ Headline Action Packed Week

The week ahead is poised to be action-packed as the Federal Reserve, the European Central Bank (ECB), and the Bank of Japan (BOJ) will announce their interest rate decisions following their respective policy meetings. Although all eyes are on the Fed, market sentiment suggests a potential pause, although there is still a 25% probability that the U.S. central bank may opt for a 25 basis point rate hike.

Fed to Consider Pausing Rates

Given the slowdown in the U.S. economy, the Federal Reserve may find room to pause its consecutive interest rate rises, totaling 500 basis points. The key question that looms over the markets is whether the Fed will simply skip a hike in June and resume its tightening campaign in July.

Short-Term Outlook

As the market awaits the outcome of these central bank meetings, traders and investors will closely monitor the decisions and statements for hints about the future direction of interest rates, which could significantly impact the USD/JPY in the short term. Looking ahead, hawkish Fed, dovish BOJ will set a bullish tone for the Dollar/Yen.

Technical Analysis

The USD/JPY has been trading inside 142.216 (R1) and 137.859 (PIVOT) for two weeks. This indicates investor indecision and impending volatility. It also means that traders are waiting for a catalyst. That catalyst could be next week’s CPI report or Fed interest rate decision.

The mid-point of this range is 140.038. The Forex pair is currently straddling this level, which suggests neutral momentum.

Since the main trend is up, buyers are likely to come in on a pullback into 137.859 (PIVOT). These traders will be looking for value. However, if it fails then look out to the downside. This could trigger a near-term acceleration into 134.783 (S1).

If the pivot holds and the upside momentum increases, then we’re going to assume that buyers are chasing the USD/JPY because of some bullish news. This could create the upside momentum needed to challenge 142.216 (R1). Look for counter-trend sellers on the first test of this level.

Essentially, we have an upside bias with the news likely to decide whether to buy a pullback into a value area, or chase news-driven strength.

Resistance & Support Levels

PIVOT – 137.859 R1 – 142.216
S1 – 134.783 R2 – 145.292
S2 – 130.425 R3 – 149.650

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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