USD/JPY analysis: BoJ and FOMC Meetings Key Focus in Financial Markets – Currency Pair of the Week

• USD/JPY analysis: Will BOJ finally end negative interest rates?
• After BoJ, focus will shift to FOMC and the dot plots
• USD/JPY technical levels to watch include 149.20 and 150.00 on upside and 148.00 and 146.50 on the downside

BoJ and FOMC Meetings Take Centre Stage

The USD/JPY will face a major test in the week ahead, with both the Bank of Japan and US Federal Reserve set to make monetary policy decisions a day apart. The USD/JPY has managed to recover strongly, rising from around 146.50 to above 149.00 in a few days. The recovery has been driven in part because of a rebound in bond yields a stronger dollar. The greenback rose against all major currencies last week thanks to strong inflation data raising some concerns that the Fed will keep rates high for longer. Meanwhile, the Japanese yen has also weakened against not only the dollar but other currencies too, after its recent gains that were driven by speculation the BoJ will hike interest rates.

USD/JPY analysis: Will BOJ finally end negative interest rates?

The yen’s weakness last week goes to show how strongly corelated it is with US Treasurys. A selloff in the latter lifted yields, which overshadowed the impact of expectation over a long-awaited 10 basis point BOJ rate hike last week.

While the BoJ could wait until April to take a closer look at consumer developments, recent reports indicate that the Bank of Japan is in the process of phasing out its negative interest rate policy (NIRP) at its meeting in the upcoming week. While previous hints from the BOJ have led to disappointment, the central bank has emphasised the importance of wage discussions for months, instilling greater confidence among traders that Governor Ueda and colleagues may indeed initiate a policy shift.

However, it remains to be seen whether the BoJ will alter the course for monetary policy. Recent comments from BoJ Governor Kazuo Ueda, who warns that ‘weakness has been seen in some data’ while speaking in front of parliament, has raised some doubts about policy tightening. Comments from a few other BoJ officials have also pointed to reluctance in switching gears.

One thing that BoJ observers were watching closely was Japan's spring wage negotiations, which have now concluded. The outcomes of these negotiations were largely in line with the Bank of Japan's objectives. Japanese companies have agreed to the most substantial pay increases in over three decades, averaging over 4%, surpassing last year's 3.6% rise. This development holds significance as smaller enterprises, which constitute the majority of Japanese employers, typically offer more modest raises.

These wage hikes may prompt the BoJ to reconsider its negative interest rate policy, especially if they contribute to achieving sustained inflation closer to the 2% target. The BOJ's forthcoming decision hinges in part on these wage dynamics. The outcomes point to a potential shift in BoJ’s policy.

What happened at the last BOJ meeting?

The Bank of Japan kept its key short-term interest rate unchanged at -0.1% and that of 10-year bond yields at around 0% during its January meeting, as expected. Meanwhile, in a quarterly outlook, the BoJ slashed CPI readings for FY 2024 to 2.4% from October's projections of 2.8%, reflecting a recent decline in oil prices. Oil prices have since bounced back, so that’s another factor that the BoJ might take into account when deciding on monetary policy on Tuesday. In January, policymakers also cut their 2023 GDP growth forecast to 1.8% from 2.0%. For FY 2024, the bank revised higher its GDP outlook to 1.2% from 1.0%, supported by pent-up demand. After the decision, BoJ Governor Ueda commented that any potential rate hike would initially seek to maintain BOJ policy in support of the economy and would strive to minimize disruptions.

USD/JPY analysis: After BoJ, focus will shift to FOMC

The key point that traders will take into account for the FOMC meeting is that the dot plots will get updated at this meeting, so it is very important even if no rate cuts are expected on Wednesday.

Following last week's unexpectedly high CPI report, Thursday's significant rise in producer prices appears to have solidified the stance on Fed policy for those who were undecided. However, despite these developments, Fed fund futures continue to indicate a near 60% probability of a rate cut in June. Producer Price Index (PPI) surged to its fastest pace in six months, reaching 1.6% year-on-year, exceeding expectations of 1.1%, with the previous month's figure also revised upward to 1% year-on-year. Core PPI climbed to 2% year-on-year, surpassing the anticipated 1.9%, or 2.8% year-on-year excluding food, energy, and transportation. Retail sales added to the hawkish tone, rising by 1.3% year-on-year, although core retail sales only increased by 0.3% month-on-month compared to the anticipated 0.5%. Nonetheless, considering Thursday's data, alongside elevated levels of consumer inflation and core CPI nearly double the Fed's 2% target, a rate cut in June seems like a coin-flip to me at best.

The Fed will update its economic forecasts at its meeting on Tuesday. The December dot plot had a median estimate of 3 cuts this year. But in light of the strength in inflation, there is a chance that the median could drop to 2 cuts, and that could light a match under the US dollar’s bull fire, if seen. Otherwise, if the plots indicate 3 or more cuts then that could send the dollar tumbling.

USD/JPY technical analysis

Source: TradingView.com

Ahead of the BoJ meeting, the key levels to watch on the USD/JPY are 149.20 and 150.00 on the upside, which were former support levels, while 148.00 and then 146.50 are the next two potential support levels to watch, with the latter also marking the 200-day average.

If the BOJ doesn’t deliver a rate hike, I would imagine the USD/JPY could break out to a new high for the year and potentially surpass the last highs from the last couple of years of 151.90/5 area to hit a fresh multi-decade high above 152.00 handle.

However, if the BoJ hikes, then this could pave the way for another drop towards the support levels mentioned above. Whether or not the USD/JPY will then go on to drop much lower will depend on how hawkish or otherwise the BOJ turns out to be.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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