USD/JPY Forecast: The Bank of Japan to Set the Stage for the Yen

Highlights

• The USD/JPY gained 0.44% on Monday, ending the session at 142.758.
• On Tuesday, the Bank of Japan will deliver its heavily anticipated monetary policy decision.
• Later in the Tuesday session, Fed speakers and US housing sector numbers warrant consideration.

USD/JPY Movements on Monday

The USD/JPY rose by 0.44% on Monday. Following a 0.21% gain on Friday, the USD/JPY ended the day at 142.758. The USD/JPY declined to a low of $142.030 before climbing to a high of 143.159.

The Bank of Japan Takes Center Stage

On Tuesday, the Bank of Japan is in the spotlight. The market focus will be on the Bank of Japan’s final policy decision of the year. Economists expect the BoJ to leave interest rates at -0.10% today. However, uncertainty about the timing of a pivot from negative rates exposes the USD/JPY to a hawkish outlook on monetary policy.

Economists are divided on when the Bank will move away from ultra-loose monetary policy. According to a Reuters Poll from Friday, all 28 economists responding to the poll expect the BoJ to leave interest rates unchanged on Tuesday. However, 80% expect the BoJ to exit negative rates by the end of 2024 and 20% in January 2024.

Barring a surprise BoJ pivot from negative rates, the BoJ Monetary Policy Statement and Press Conference warrant investor attention. Tweaks to the yield curve control (YCC) policy and clues on when the Bank plans to exit negative rates would move the dial.

The Fed and the US Housing Sector in Focus

On Tuesday, US housing sector numbers will garner investor interest for the second session. Economists forecast US housing starts and building permits to decline by 0.8% and 1.2%, respectively, in November.

While a larger-than-expected decline could test buyer appetite for the US dollar, investors must consider recent trends. Building permits and housing starts increased by 1.8% and 1.9%, respectively, in October.

Falling mortgage rates contributed to an upswing in the US NAHB Housing Market Index in December. Numbers from Monday suggested an improving housing sector environment.

Nonetheless, economists consider housing sector data as leading indicators for the US economy. Worse-than-expected numbers could raise red flags about the economic outlook. Deteriorating housing market conditions could affect consumer confidence and spending. Downward trends in spending and a weakening housing market would impact the US economy.

The US housing sector and US private consumption contribute over 15% and 60% to the economy.

Beyond the numbers, investors must monitor Fed chatter. Hawkish comments could temper market bets on a Q1 2024 Fed rate cut.

Short-term Forecast

Near-term USD/JPY trends will hinge on the Bank of Japan and US economic indicators. A non-committal BoJ to exiting negative rates could impact buyer demand for the Yen. Sticky US inflation could tilt monetary policy divergence toward the US dollar.

USD/JPY Price Action

Daily Chart

The USD/JPY remained below the 50-day and 200-day EMAs, affirming bearish price signals.

A USD/JPY move through the 200-day EMA would give the bulls a run at the $144.713 resistance level.

On Tuesday, the Bank of Japan and the US housing sector could influence session trends for the USD/JPY.

However, a break below the $142.177 support level could signal a fall to the 139.359 support level.

The 14-day RSI at 34.04 suggests a USD/JPY fall below the 142.177 support level before entering oversold territory.

4-Hourly Chart

The USD/JPY sat below the 50-day and 200-day EMAs, reaffirming bearish price signals.

A USD/JPY break above the 50-day EMA would support a move to the 144.713 resistance level.

However, a fall through the 142.177 support level would give the bears a run at the 139.359 support level.

The 14-period 4-hour RSI at 46.22 suggests a USD/JPY drop below the 142 handle before entering oversold territory.