USD/JPY Forecast: Weaker on Concerns Over Federal Reserve’s Rate Hike Outlook

USD/JPY Highlights

• USD/JPY falls due to Federal Reserve’s rate hike outlook
• BOJ policy remains ultra-loose to counter inflation risks
• Market is focused on a peak in Fed rates 

USD/JPY Overview

The USD/JPY is down on Monday as traders try to continue the sell-off that started last Wednesday. The selling was fueled by the Federal Reserve’s hinting that it may end its rate increase cycle. On Friday, the pair temporarily rose due to stronger-than-expected US labor market data, but this report may have been misinterpreted as the reports for February and March were actually revised downwards.

As of 05:21 GMT, the USD/JPY is trading at $134.764, which is down $0.086 or -0.06%. On Friday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.11, down $0.30 or -0.43%.

Fed Rate Cut Possible Despite Strong US Labor Market

Last week, the Federal Reserve raised rates by 25 basis points and offered various degrees of caution about the outlook. The market interpreted this as a signal that rate hikes may be slowing or stopping. This caused a significant decline in the Dollar/Yen pair.

The CME FedWatch tool is currently pricing in a one-third chance of a rate cut as soon as July. This is even though the US jobs data released on Friday was stronger than expected. The Fed has tended to avoid suggesting rate cuts this year, which is not aligned with the rates market that is pricing in cuts.

If the Federal Reserve is correct in its outlook for 2023, then it will be difficult for the dollar decline to continue. However, for now, the market is likely to focus on the idea that a peak in Fed rates justifies a peak in the dollar’s value.

BOJ Cautious Over Inflation Risks

Minutes from the Bank of Japan’s March policy meeting revealed that some members of the board believe the central bank must remain cautious of the risk of inflation rising more than expected. A few members noted positive signs in the Japanese economy, but many others highlighted the high uncertainty of the economic outlook, which supported the decision to maintain ultra-loose monetary policy.

BOJ Analyzes Inflation Amid Price Hikes

The board discussed the continuing increase in prices as well as broadening price increases in services. Members also emphasized the importance of analyzing a wide range of data to understand inflation developments. It was noted that companies were continuing to hike prices to pass on rising raw material costs.

BOJ Sees Progress, Maintains Policy

At the same time, the board acknowledged some positive signs that suggest the economy is making progress towards achieving the BOJ’s 2% inflation target. Despite this, there is “extremely high” uncertainty over Japan’s economic outlook that warrants keeping monetary policy ultra-loose, the minutes showed.

BOJ Cautious Amid Leadership Change

The minutes also mentioned that any policy shift should be made cautiously due to its significant impact on the public and the markets. Furthermore, the meeting was the last one chaired by former governor Haruhiko Kuroda, who retired in April and was replaced by Kazuo Ueda. There is speculation that Ueda may steer the BOJ away from the radical stimulus measures deployed by Kuroda, which has been criticized for distorting market pricing and crushing financial institutions’ profits.

Technical Analysis

The USD/JPY is currently straddling the daily technical pivot point of $134.518. This chart pattern typically indicates investor indecision or an upcoming shift in momentum. The main trend remains upward, but short-term momentum is down. Trader reaction to the pivot will determine the near-term direction.

A return of buyers could push the price above $137.913, retesting last week’s high, and possibly reaching resistance (R1) at $138.452. Conversely, a pivot failure may lead to weakness and a possible decline to the nearest support (S1) at $132.471.

Overall, the direction of USD/JPY is dependent on how traders respond to the pivot, with potential for either further upward momentum or downside weakness.

Resistance & Support Levels