USD/JPY Fundamental Daily Forecast – Traders Bracing For Hawkish Tone from Fed Chair Powell

The Dollar/Yen is trading nearly flat on Wednesday as traders positioned themselves ahead of the U.S. Federal Reserve’s interest rate announcement and monetary policy statement, due to be released later in the session at 19:00 GMT.

Investors are expecting the Federal Reserve to hike its benchmark interest rate by 25 basis points in its latest effort to tame high inflation. However, investors will also be looking to the central bank for guidance on rate policy and its expectations for broader economic developments.

At 08:12 GMT, the USD/JPY is trading 130.178, up 0.073 or +0.06%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $71.62, up 0.19 or +0.27%.

Fed Expected to Slow Rate Hikes but Will Continue to Fight Inflation

The Federal Reserve is expected to raise its benchmark interest rate by 25-basis points Wednesday afternoon, its smallest increase since it began hiking rates in March 2022.

Ahead of the Fed rate announcement, the market thinks the Fed will stop raising rates in March in the 4.75% -5% range. Fed policymakers may be eyeing a June cutoff with the terminal rate over 5%.

Additionally, some traders are expecting Federal Reserve Chairman Jerome Powell to sound hawkish, meaning he will lean toward tighter policy and keeping interest rates high.

However, there are some who are expecting a more dovish tone from the Fed, or looking for signs that a pause in hikes or even a pivot is coming soon. Some also believe that recent economic strength likely means the Fed will be able to manage a “soft-landing” if there is a recession.

Powell’s Post-Meeting Remarks Could Set the Near-Term Tone

We have already heard from central bank policymakers distinctly telegraphing Wednesday’s policy decision:  a quarter-of-a percentage-point increase in their benchmark interest rate, the smallest since they kicked off their tightening cycle 10 months ago with one the same size.

Less clear is whether Powell and his cohorts will continue to signal “ongoing increases” ahead of the policy rate as evidence mounts that inflation and the economy are both losing momentum.

The biggest fear for investors is that the Fed will raise rates too high or for too long, and thus put the economy into recession.

Experts Looking for Hawkish Tone from Powell

Rick Rieder, BlackRock’s chief investment officer for global fixed income expects Powell to deliver his comments with a hawkish tone. “I think if he’s hawkish, I think the markets have built that in. I think if he’s not, the market could make another leg,” he said. This could mean another spike down in the USD/JPY.

“I think he’s going to be hawkish relative to market pricing,” said Jim Caron, head of macro strategies for global fixed income at Morgan Stanley investment Management.

Additionally, “Aggressive tightening in 2022 has led to signs of decelerating inflation but from levels that remain unacceptably high,” Ron Temple, chief market strategist at Lazard said in a Tuesday note. “With a 25bps hike already discounted by markets, Powell’s task is to unambiguously signal the Fed’s commitment to tame inflation.”

Short-Term Outlook

The market has already priced in the 25 basis point rate hike so Powell’s tone will likely move the USD/JPY.

The Dollar/Yen could spike higher if Powell comes across as hawkish. However, gains are likely to be limited because investors expect the Bank of Japan to become less-ultra-dovish in a couple of months.

If Powell is dovish then look for the USD/JPY to plunge into 126.362.