The USD/JPY pair experienced a notable rise on Thursday, reaching 143.79 during early trading, supported by the recovery of the U.S. dollar.
Investors are now focused on the Bank of Japan’s interest rate decision scheduled for Friday, following the U.S. Federal Reserve’s decision to cut interest rates by 50 basis points to a range of 4.75% – 5.00% on Wednesday.
These developments have had a direct impact on the movements of both the dollar and yen, as the market closely watches their short- and medium-term effects.
The Fed’s rate cut was largely expected, particularly given the ongoing decline in inflation rates and persistent concerns over the U.S. labour market.
Fed Chair Jerome Powell described the move as “strong” but necessary to maintain economic stability. The Fed raised its long-term interest rate forecasts to 2.9% from 2.8% and slightly lowered its 2024 GDP growth outlook from 2.1% to 2.0%. These indicators led to market volatility as investors tried to digest the potential future consequences of this decision.
In my view, the Fed continues to take a cautious approach to monetary policy, guiding markets to expect no further rate cuts until the next meeting in November. This delay reflects lingering concerns about the U.S. economy, especially with expectations that the unemployment rate will remain at 4.4% through the end of 2024. As a result, the U.S. dollar’s movement may be affected by a reduced appetite for risk, which could weaken its strength against the Japanese yen in the near term.
As for the U.S. Dollar Index (DXY), it rose today by 0.20%, reclaiming the 101.00 level. However, in my opinion, the dollar may face pressure with growing expectations of another rate cut later this year, which could limit gains for the USD/JPY pair. The Fed’s dovish stance may gradually lead to a decline in the dollar, especially in the absence of strong support from U.S. economic data.
On the other hand, I expect the Bank of Japan to maintain its current monetary policy during its upcoming meeting. However, forecasts suggest that the BoJ may raise rates by the end of the year, which opens the door for a narrowing of the gap between U.S. and Japanese interest rates. This gap has been a key driver of USD/JPY’s rise in recent months, and with its potential narrowing, we may see the dollar weaken against the Japanese yen.
From my perspective, Japan’s authorities have always closely monitored rapid currency movements. Japan’s Finance Minister Shunichi Suzuki recently noted that while exchange rate volatility can have both positive and negative effects on the economy, “rapid fluctuations are undesirable.” Therefore, the BoJ is likely to remain cautious in its future steps, avoiding any major moves that could destabilize the markets.
In my opinion, bond market movements indicate increasing odds of significant shifts in monetary policies. The yield on Japan’s 10-year government bonds has hit a one-month low, dropping to 0.83%. This decline mirrors expectations that the Fed may adopt a more aggressive rate cut in the near term. Such moves drive investors towards safe-haven assets like the yen, which could strengthen its value against the dollar.
Given these fundamental factors, the USD/JPY pair is likely to continue fluctuating in the coming weeks. In the short term, we may see pressure on the dollar if expectations of further U.S. rate cuts persist. Conversely, any signal from the BoJ regarding a rate hike could significantly boost the yen’s strength.
In the medium term, Japan’s interest rate outlook will play a crucial role in USD/JPY movements. If the BoJ raises rates in December, as markets expect, this could lead to a substantial decline in the dollar against the yen. However, if this decision is postponed beyond October, we might continue to see the current volatility, with markets closely watching both the Fed’s and BoJ’s decisions.
In conclusion, while the USD/JPY remains under the influence of monetary decisions from both the U.S. and Japan, investors should remain cautious as trends can shift quickly based on any new economic developments. The upcoming moves from the Fed and the BoJ will be key in determining the pair’s direction, and it is crucial to closely monitor any signals from both sides to make precise market analyses.
Technically, the USD/JPY pair initially dropped towards 140.40 after the Federal Reserve cut its key interest rate on Wednesday. However, markets quickly regained balance, pushing the pair back to its weekly high near 143.79. The pair is currently trading in a corrective technical zone, facing the possibility of sideways consolidation that could pressure both buyers and sellers into a narrow but volatile range in the near term.
The overall downward trend for USD/JPY remains intact and valid, but the Fed’s decision to cut interest rates by 50 basis points may result in mixed price reactions. The Relative Strength Index (RSI) supports the sellers, indicating that further declines could follow once the current correction phase concludes.
The interest rate cut may be positive for the USD/JPY pair, contrary to market expectations, especially since Powell clarified that future cuts will be data-dependent and that the Fed will maintain its cautious approach. This pushed prices to the September 17 high of 142.47, followed by a brief dip to 140.33 before rebounding to 143.79, reflecting the immediate market shock to the U.S. interest rate news and igniting anticipation for the Bank of Japan’s decision.
Despite the attempts at bullish retracement, the overall trend for USD/JPY remains bearish, with the key psychological support level at 140.00 being a significant downside target. If this level is breached, strong bearish control over the trend will persist. In this scenario, technical indicators are likely to move toward oversold levels.
The near-term fate of USD/JPY will largely depend on market reactions to central bank decisions this week. However, if key support levels are broken, the price could find the next support around 138.00, potentially consolidating to gather more downward momentum at this level. On the other hand, according to the daily chart, the key psychological resistance at 150.00 would be critical for a real reversal to a bullish trend if it is broken and sustained.
Support levels: 142.85 – 141.42 – 140.00
Resistance levels: 143.98 – 145.05 – 150.00
