USD/JPY forecast: Fed and BoJ decisions loom

Markets were a bit calmer during the first half European sessions, as oil prices eased lower and that encouraged some dip-buying in indices and gold. But the FX markets were little-changed, with the USD/JPY trading around that pivotal 155.00 handle ahead of the Federal Reserve’s rate decision later on. The pair has rebounded in recent days as rising US bond yields and elevated oil prices have shifted the market’s focus back towards inflation and the prospect of a more hawkish Fed rate hike than was the case a few weeks ago.

 

What is driving the USD/JPY pair?

 

Consequently, investors have once again been focusing on the yield differential between US rates and the rest of the world. This remains a significant headwind for major FX pairs like EUR/USD, CHF/USD and JPY/USD (I know, I know). That said, the prospect of a hawkish Bank of Japan has also kept a lid on the dollar’s gains against the yen, preventing the USD/JPY pair from following the broader dollar rebound more aggressively.

 

The result is a market that is now finely balanced ahead of the two important policy events. If oil prices continue to rise and Treasury yields remain elevated, the USD/JPY forecast could regain a more decisive bullish bias. That view would be challenged, however, by a significant surprise from either central bank.

 

Yields and oil retain market’s focus

 

Granted, the Fed will make some headlines today, but it is the recent global bond sell-off that financial markets are focusing the most on. Ahead of the FOMC decision, bonds have stabilised somewhat along with indices. This comes after the US 10-year Treasury yields moved above 5% this week for the first time since 2007, with surging energy prices, persistent inflation concerns and heavy government borrowing weighing on fixed-income markets.

 

The question now is whether the yields will continue to rise post-FOMC. A 25-basis-point rate increase is fully priced in, leaving the more consequential question of what policymakers signal about the path beyond today’s decision.

 

The renewed oil shock makes it unlikely for the Fed to be dovish about near-term policy. If the Fed warns about further hikes or implies thereof, that could keep US yields elevated and provide the dollar with a fresh source of support.

 

For the USD/JPY forecast, higher US yields relative to Japan make the pair a long candidate from a treading point of view, post-FOMC. But the focus will then quickly turn to the Bank of Japan.

 

BoJ guidance could determine the yen’s response

 

The Bank of Japan is expected to raise rates by 25 basis points on Friday, but much of that move is already reflected in market pricing. The yen’s reaction may therefore depend more on any guidance we get from Governor Ueda.  Unless the BoJ delivers a larger-than-expected increase or signals greater confidence in accelerating the tightening cycle, the decision may struggle to generate sustained yen strength.

 

That leaves USD/JPY exposed to a familiar policy divergence: a hawkish Fed could encourage investors to rebuild dollar-yen positions, while a less forceful BoJ could leave yen bulls disappointed.

 

Technical USD/JPY forecast and technical levels to watch

 

 

The USD/JPY has recovered to around 155.00 after rebounding from its recent lows. A clean break above the 155.00-155.30 area, ideally on a daily closing basis, could open the way towards 156.00–157.00 zone next. Above that, we have the larger 158.00–158.60 resistance zone next.

 

Conversely, failure to break and hold above 155.00-155.30 area would weaken the near-term bullish case and could send USD/JPY back towards 154.00 initially and then 153.00 next. A deeper pullback could expose the year-to-date low around 152.10.