USD/JPY Forecast: Trader Focus on Fed Rate Pause, BOJ’s Accommodative Stance

Highlights

• Dollar/Yen steady near multi-month high ahead of Fed and BOJ decisions.
• Fed expected to pause rate hikes, but doubts linger on future stance.
• Bank of Japan to maintain accommodative policy, focus on inflation forecast.

Overview

The Dollar/Yen remains steady near its multi-month high as traders remain cautious ahead of key monetary policy decisions from the U.S. Federal Reserve and the Bank of Japan this week. The upcoming interest rate announcement from the Fed on Wednesday is expected to signal a pause in rate hikes, reflecting the improved risk sentiment that pushed Wall Street to a 13-month high. Market focus will also be on the U.S. consumer price index and producer price index data, as a higher-than-expected CPI number could impact rate expectations.

Debate Over Fed’s Rate Stance

The Fed is anticipated to maintain its current interest rate levels, but there are doubts about whether they will adopt a dovish stance that could entice Dollar/Yen bears back into the market. Some analysts believe that the Fed’s decision to hold rates is a temporary measure and that additional tightening could still be on the horizon in subsequent meetings.

BOJ Forecasts Moderate Recovery

Meanwhile, the Bank of Japan is likely to continue its accommodative monetary policy and forecast a moderate economic recovery. The central bank acknowledges the positive signs in domestic consumption but emphasizes the importance of sustained wage growth to support long-term inflation. While exports and output may face challenges due to soft demand from the U.S. and China, the BOJ maintains its view of a gradual recovery driven by post-pandemic consumption.

Economic Surge Challenges BOJ’s Projection

Japan’s economy exceeded expectations with a 2.7% expansion in Q1 2023, and core consumer inflation reached 3.4% in April, casting doubt on the BOJ’s projection of a gradual decline below 2%. A key inflation index, excluding food and fuel, experienced its fastest pace of growth in four decades, rising by 4.1% in April. Analysts anticipate that the BOJ will upgrade its inflation forecasts in the next quarterly review in July.

Traders Eye Fed and BOJ

Traders will be closely watching the monetary policy decisions from the Federal Reserve and the Bank of Japan this week. While the Fed is expected to keep rates steady, their tone and future outlook will be crucial in determining market sentiment. The Bank of Japan is likely to maintain its accommodative stance, emphasizing the importance of sustained wage growth and supporting the economy for long-term inflation. These decisions and economic indicators will shape the short-term outlook for the Dollar/Yen pair and global financial markets.

Technical Analysis

The USD/JPY has been trading inside 142.216 (R1) and 137.859 (PIVOT) for three weeks. This indicates investor indecisiveness and impending volatility. It also means that traders are waiting for a catalyst. That catalyst could be this 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. 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 on Tuesday or Wednesday likely to decide whether to buy a pullback into a value area, or chase news-driven strength.

Resistance & Support Levels

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