USD/JPY Fundamental Daily Forecast – Prices Could Be Capped if Fed Announces Dovish Pivot on Wednesday

The Dollar/Yen is trading flat early Tuesday as many of the major players take to the sidelines ahead of the start of the Federal Reserve’s two-day meeting that ends on Wednesday with the release of a major interest rate announcement.

On Monday, the Forex pair surged to a one-week high, regaining some of the luster lost earlier in the month from a massive intervention by Japanese officials. The dollar was also bolstered by expectations of another supersized rate increase at this week’s Federal Reserve monetary policy meeting.

At 01:00 GMT, the USD/JPY is trading 148.594, down 0.157 or -0.11%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $62.83, down $0.50 or -0.79%.

Despite forecasts calling for a fourth-straight 75-basis point rate hike by the Fed, the dollar’s gains could be limited if the Fed signals on Wednesday that the pace of rate hikes will slow as it assesses the impact so far of its policy tightening.

Ahead of the rate hike announcement, traders are predicting the benchmark overnight interest rate will reach 3.75% to 4.00%. But for the December meeting, Fed Funds futures have priced in on Monday a 55% chance of a 50-basis point rate increase, down from about 67% last Friday.

How Much Did the Intervention Cost?

On Monday, Japan’s finance ministry said it spent a record $42.8 billion on currency intervention in October to prop up the Yen. A steep drop in the Yen to a 32-year low of 151.94 to the dollar on October 21 likely triggered the intervention, followed by another one on October 24.

October Factory Growth Hits 21-Month Low

Japan’s manufacturing activity grew at its slowest pace in 21 months in October on marked declines in output and overall new orders, as exports were partly hurt by worsening conditions in China and South Korea, Reuters reported.

The data suggested the outlook for manufacturers at home and trade activity in the broader region was uncertain, posing a headache for Japanese policymakers as they brace for a potential global recession due to monetary tightening around the world, according to Reuters.

The au Jibun Bank Japan Manufacturing Purchasing Managers’ Index fell to a seasonally adjusted 50.7 in October from September’s 50.8 final.

Daily Forecast

We could see a tight trading range on Tuesday as investors position themselves ahead of the Fed’s interest rate decision.

Currently, Dollar/Yen traders are in wait-and-see-mode after traders saw a little more of a balanced tone from some other central banks.

The question that everyone is asking and what could be the source of volatility on Wednesday is, “Will the Fed announce a dovish pivot or will policymakers surprise investors with more hawkish rhetoric?”