USD/JPY Fundamental Daily Forecast – Low Inflation Main Reason BOJ Will Remain Accomodative

The Dollar/Yen is trading slightly lower in limited price action early Friday as investors await the release of the Bank of Japan’s interest rate decision and monetary policy agreement. The Forex pair is up about 1 percent, spiking to a three-week high at 110.850 after the U.S. Federal Reserve’s monetary policy announcement on Wednesday.

At 0208 GMT, the USD/JPY is trading 110.576, down 0.050 or -0.05%.

The BOJ is expected to leave monetary policy unchanged, when it concludes its two-day June monetary policy meeting this Friday. At this time, we don’t believe the central bank has any plans of exiting from its ultra-loose monetary policy.

The BOJ is widely expected to keep its short-term interest rate target at minus 0.1 percent and its pledge to guide 10-year government bond yields around zero percent.

Firstly, inflation underperformed again. In April, Japan’s core inflation rate fell to 0.7 percent. This keeps it well off the pace of the BOJ’s price stability target of 2 percent.

Secondly, traders are looking for answers from the central bank as to what it plans to do to boost inflation. This means that Governor Haruhiko Kuroda is likely to get peppered with questions regarding the need for additional easing to help the central bank reach its 2 percent goal.

Kuroda is likely to respond by delivering his standard response that inflation is trending upward and no additional stimulus will be necessary.

Finally, as usual, Mr. Kuroda will maintain his position that intentions with regard to changes to monetary policy are not reflected in daily market operations and that the BOJ will persist with monetary easing.

As a side note, Kuroda may be questioned about escalating trade frictions and U.S. President Trump’s threat to impose tariffs on auto imports – both risks to Japan’s export-reliant economy.

Going into the report, the USD/JPY main trend is up. However, the technical reversal top on Wednesday suggests the selling may be greater than the buying at current price levels. A drive through 110.850 will negate the potentially bearish chart pattern and could trigger an acceleration to the upside with 111.396 the next major upside target.

On the downside, taking out 109.910 will be the first sign of a pick-up in selling pressure, while a break through 109.179.

Overall, we are anticipating an upside bias because of the divergence between the hawkish U.S. Federal Reserve Monetary Policy and the dovish monetary policy of the Bank of Japan.