USD/JPY Forecast: Steady Ahead of Fed’s Decision on Interest Rates

Highlights

• USD/JPY trades subdued ahead of Federal Reserve policy meeting.
• Soft U.S. inflation figures support a rate pause by the Fed.
• Bank of Japan expected to maintain ultra-easy policy settings.

Overview

The USD/JPY is trading sideways-to-lower on Wednesday. Market participants have turned their attention to the Fed’s policy meeting, set to conclude today at 18:00 GMT. With expectations of a less aggressive stance from the central bank, the dollar eased 0.09% to 140.11 yen. Surprisingly, despite soft U.S. inflation figures, the dollar had climbed to its highest level since June 5, reaching 140.31 yen on Tuesday. Meanwhile, the Bank of Japan is anticipated to maintain its ultra-easy policy settings.

US CPI Data Reinforces Fed Rate Pause Expectations

The U.S. CPI report released overnight revealed a minimal increase in prices for May, with a mere 0.1% rise from the previous month. On an annual basis, consumer prices saw a 4% increase, the smallest in over two years, following April’s 4.9% growth. These figures solidified traders’ expectations of a rate pause by the Federal Reserve, with a 94% likelihood as the two-day policy meeting concludes. However, there is also a 60% probability of a rate hike in July, according to the CME FedWatch Tool, leaving room for a potential hawkish surprise.

Treasury Yields Reflect Cautious Approach

Despite the soft headline inflation supporting the Federal Reserve’s decision to pause its rate hiking cycle, the persistence of core inflation figures keeps the possibility of a rate hike in the coming months alive. This cautious approach is clearly reflected in the movement of Treasury yields, where two-year yields experienced a brief surge, reaching their highest level since March before easing during Asian trading hours. Similarly, benchmark 10-year yields also climbed to their highest point in 2-1/2 weeks, peaking at 3.8450%, only to subsequently decline by 3 basis points to 3.8056%. These fluctuations in Treasury yields indicate the market’s uncertainty and anticipation surrounding future monetary policy decisions.

BOJ to Maintain Ultra-loose Monetary Policy

As the Federal Reserve enters a potential hawkish pause, it emphasizes that the rate hiking cycle might not be concluded. The ultimate outcome will depend on incoming data.

On the other hand, the BOJ is expected to maintain its ultra-loose monetary policy in the face of a moderate economic recovery. Strong corporate and household spending act as a buffer against slowing overseas demand. The central bank may even signal that inflation is surpassing its projections. This will potentially lead to an upgrade in its price forecasts at the quarterly review in July. However, any adjustment to its inflation view is unlikely to automatically trigger an interest rate hike, as the BOJ Governor stresses the importance of sustained wage growth alongside price rises.

BOJ Aims to Support Economy

The Bank of Japan’s two-day policy meeting concludes on June 16. Traders are expecting the BOJ to maintain the current short-term interest rate target of -0.1% and the 0% cap on the 10-year bond yield. The central bank’s goal is to support the economy, sustain positive signs, and achieve 2% inflation in Japan.

Fed to Pause, but Beware of Hawkish Surprise

In conclusion, the USD/JPY pair experiences subdued trading as the market awaits the outcome of the Federal Reserve’s policy meeting. While a rate pause is expected, the possibility of a hawkish surprise in the coming months remains. Meanwhile, the Bank of Japan maintains its ultra-loose monetary policy to support the moderate economic recovery, emphasizing the need for sustained wage growth to accompany inflation.

Technical Analysis

The USD/JPY currency pair has been stuck in a tight trading range between 142.216 (R1) and 137.859 (PIVOT) for the past three weeks. This is reflecting indecisiveness among investors and foreshadowing a potential surge in volatility. Traders are eagerly awaiting a catalyst that could break the deadlock. One event on the horizon holds the potential to do just that.  It is today’s highly anticipated Federal Reserve interest rate decision.

USD/JPY at Neutral Momentum

At the heart of this range lies the midpoint at 140.038, which is where the USD/JPY currently finds itself. This is signaling neutral momentum. Considering the prevailing upward trend, buyers are likely to step in if there is a pullback towards the 137.859 (PIVOT) level. They are the value seekers. However, failure to hold this level could pave the way for a downside move, potentially triggering a near-term acceleration towards 134.783 (S1).

In essence, the overall bias remains skewed to the upside. The impending Fed interest rate decision news is likely to dictate whether traders opt to buy into a pullback at a value area or chase strength driven by market-moving developments.

Resistance & Support Levels

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